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Public-private Collaboration for Export Success: Case Studies from Barbados, Ghana, India, Thailand and Malaysia

Report by ITC, 2011

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This guide demonstrates the value of business advocacy on trade policy issues featuring the Barbadian tourism industry, customs services in Ghana, Thailand’s automotive industry, Penang, Malaysia’s export hub for electronics, and India’s textile parks.

United Nations Sales No. E.11.III.T.2


USD 50
ISBN 978-92-9137-393-2


EXPORT IMPACT FOR GOOD


PublIC-PRIvATE COllAbORATIOn
FOR EXPORT SuCCESS


CASE STuDIES FROM bARbADOS, GhAnA,
InDIA, ThAIlAnD AnD MAlAySIA




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Public-Private collaboration
for exPort SucceSS


caSe StudieS from barbadoS, Ghana,
india, thailand and malaySia


Geneva 2011




ii


ABSTRACT FOR TRADE INFORMATION SERVICES


ID=42491 2011 F-01.04 PUB


International Trade Centre (ITC)
Public-private collaboration for export success: Case studies from Barbados, Ghana, India, Thailand and Malaysia
Geneva: ITC, 2011. ix, 101 p.


Compilation of case studies aimed at business leaders, policymakers and development practitioners, showcasing
successful experiences of public-private dialogue in developing countries – outlines activities driven by the governments
and targeted at private sector players in the form of public-private partnerships for service delivery and public-private
consultative bodies; presents private sector initiatives targeted at public sector players in the form of business advocacy;
demonstrates essential role of the private sector in trade and development through examples featuring the Barbadian
tourism industry, customs services in Ghana, Thailand’s automotive industry, Penang’s export hub for electronics, and
India’s textile parks.


Descriptors: Partnership, Public Sector, Private Sector, Case Studies, Barbados, Ghana, India, Malaysia, Thailand.


English, French, Spanish (separate editions)


ITC, Palais des Nations, 1211 Geneva 10, Switzerland (www.intracen.org)


The designations employed and the presentation of material in this publication do not imply the expression
of any opinion whatsoever on the part of the International Trade Centre concerning the legal status of any
country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries.


Digital image on the cover: © iStockphoto


© International Trade Centre 2011


All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or
by any means, electronic, electrostatic, magnetic tape, mechanical, photocopying or otherwise, without prior permission in
writing from the International Trade Centre.


P245.E/DCP/BTP/11-IX ISBN 978-92-9137-393-2
United Nations Sales No. E.11.III.T.2




iii


foreword


The global community firmly acknowledges the critical importance of the private sector as an engine of economic growth,
sustainable development and poverty reduction. However, the private sector needs an enabling, business-friendly
environment to effectively harness this potential.


Public-private collaboration has been a key driver in countries’ strategies for successful integration into the global economy.
Experience shows that governments in developing and least developed countries focusing on export-led growth strategies
must establish a mechanism for sustained and inclusive dialogue between the public and private sectors.


Expanding global trade opportunities is the focus of the International Trade Centre’s (ITC) work with enterprises, trade support
institutions and policymakers. By developing a competitive private sector supported by strong and transparent institutions,
exports can help to drive inclusive, sustainable development and become a positive force for good in communities.


Promoting public-private dialogue in formulating countries’ trade policies, legal frameworks and regulatory mechanisms is
at the heart of ITC’s work. We bring public and private stakeholders together in a structured process to find solutions for
issues affecting business performance and exports. We work together to design viable export and development strategies.
ITC contributes to the effectiveness of these dialogues by, among other initiatives, supporting well-informed business
advocacy through sharing experiences from around the world.


ITC commissioned the case studies in this book to showcase the successful experiences of public-private collaboration
in developing countries engaged in the process of integrating into the global economy. In some instances, public-private
dialogue has resulted in successful public-private partnerships.


The achievements in Barbados with the European Economic Partnership Agreement on tourism services; in Ghana with
an integrated customs services; in Thailand’s automotive industry; in Penang, Malaysia’s export hub for electronics; and in
India’s thriving textile parks clearly demonstrate the essential role played by the private sector in trade and development.


Trade, development and poverty reduction are strongly linked. By creating the conditions for robust, sustainable, export-led
growth, governments and the private sector are also making a valuable contribution towards achieving the United Nations
Millennium Development Goals to reduce poverty.


We hope these success stories will inspire business leaders, policymakers and development practitioners to build on best
practice for using development assistance to address market failures and to leverage private sector investment for the
greater good. We also believe these stories make a strong case for Aid for Trade.


ITC believes now is the time to move from dialogue to action, which is exactly what has happened in the countries profiled
in this book.


Patricia Francis
Executive Director
International Trade Centre




iv


acknowledGementS


Introduction – Public-private collaboration for export success


Rajesh Aggarwal, Chief, Business and Trade Policy Section and Andrew Huelin, Consultant, Business and Trade Policy
Section, ITC, wrote the introduction.


Chapter I – Business advocacy wins markets in Barbados


Natasha Ward, Trade Policy Analyst and Consultant with the Shridath Ramphal Centre for International Trade Law, Policy
and Services, Barbados; and Pierre Sauvé, Deputy Managing Director and Director of Studies at the World Trade Institute,
Bern, Switzerland, wrote this case study. They are entirely responsible for the views expressed herein.


A study of this nature entails consulting key actors in the negotiations. The authors are indebted to Samuel Chandler,
Permanent Secretary (Foreign Trade Division) at the Ministry of Foreign Affairs, and Foreign Trade of Barbados; Julie
Mapp, Consultant to the Foreign Trade Division of the Ministry of Foreign Affairs and Foreign Trade; Russell King, former
Consultant to the Foreign Trade Division of the Ministry of Foreign Affairs and Foreign Trade; Ramesh Chaitoo, Chief
Services Negotiator of the Caribbean Regional Negotiating Machinery; Lisa Gale, Chief Research Officer (ag.) with the
Ministry of Tourism; Natalie DeCaires, Industry and Advocacy Manager with the Caribbean Hotel and Tourism Association
and Sue Springer, Executive Vice-President of the Barbados Hotel and Tourism Association, for helpful discussions. Special
thanks are also extended to Ramesh Chaitoo for his constructive and insightful comments in revising the draft of case
study.


Chapter II – Boosting export competitiveness in Ghana


The case study has been prepared based on presentations made by Nortey Omaboe, Executive Chairman, GCNet, Ghana
at an ITC seminar and on a paper prepared by Emmanuel Darko, Deputy General Manager, GCNet, Ghana. We also
acknowledge the support of Mr. Omaboe in organizing visits of participants of ITC’s programmes to the GCNet to discuss
the operations and the factors contributing to the success of the GCNet.


Chapter III – Thailand’s successful journey


Prema-Chandra Athukorala, Professor at the Arnd-Corden Department of Economics, Australian National University; and
Archanun Kohpaiboon, Thamassat University, Thailand, wrote this case study. They are entirely responsible for the views
expressed.


Chapter IV – Growing with global production sharing in Malaysia


Prema-Chandra Athukorala, Professor at the Arnd-Corden Department of Economics, Australian National University
prepared this case study based on his field visits and interviews with senior officials of government and private sector
economic facilitator organizations, senior managers of major MNE affiliates and representatives of chambers of commerce
and industry. Interviewees include a number of ex-CEOs and senior managers of leading MNEs, officials of chambers
of industry and trade, and former prominent policymakers, including Chet Singh, the founding General Manager of the
Penang Development Corporation who held that position for over two decades.


Chapter V – Creating integrated textile parks in India


Biswajit Dhar, Director General, Research and Information System for Developing Countries, New Delhi, India; and T.S.
Vishwanath, Principal Advisor with APS-SLG Law Offices, Delhi, India, wrote this case study with support from RCM Reddy
and Prashant Sood of IL&FS Cluster Development Initiative Limited, New Delhi.


Other acknowledgements


The case studies were prepared under the overall guidance of Friedrich Von Kirchbach, Director, Division of Country
Programmes ITC. Rajesh Aggarwal, Chief, Business and Trade Policy Section, ITC, supervised the preparation of all case
studies. Andrew Huelin, Consultant, Business and Trade Policy Section coordinated the organization of material and
assisted in the review process. Dianna Rienstra, Phoenix Ink Communications, Brussels, was the editor and advisor for this
publication. The publication was managed by Natalie Domeisen. Desktop publishing was carried out by Lauréna Arribat.




v


contentS


foreword �������������������������������������������������������������������� iii


acknowledGementS ����������������������������������������������� iv


abbreviationS ������������������������������������������������������������� ix


introduction 1


the united nationS and Private Sector
develoPment ��������������������������������������������������������������� 2


Public-Private dialoGue in trade Policy iS
critical �������������������������������������������������������������������������� 3


towardS a balanced aPProach ������������������������� 4


Sustainable constituencies for trade policy and
regulatory reform ��������������������������������������������������������� 4
broadening good policy options �������������������������������� 4
insights from the business perspective �������������������� 5
ensuring credibility and support for policy reform �� 5


challenGeS to effective Public-Private
dialoGue ������������������������������������������������������������������������ 6


Pre-requiSiteS for dialoGue ������������������������������� 7


five country caSeS �������������������������������������������������� 7


chaPter i 11


buSineSS advocacy winS marketS
in barbadoS ������������������������������������������������� 11


caSe Study executive Summary ����������������������� 12


a SnaPShot of touriSm in barbadoS ������������� 13


recent industry performance ����������������������������������� 13


buSineSS advocacy GrouPS Get
orGanized ������������������������������������������������������������������ 14


engaging in stakeholder advocacy ������������������������� 15
collaborating and formulating positions ���������������� 15
the Government reacts favourably ������������������������� 15
the role of the caribbean hotel and tourism
association ������������������������������������������������������������������ 15


a better landScaPe for touriSm
ServiceS ����������������������������������������������������������������������� 18


market access gains ������������������������������������������������ 18


cross-border supply and consumption
abroad of services (modes 1 and 2) ������������������������ 18
commercial presence (mode 3) ������������������������������ 18
temporary presence of natural persons for
business purposes (mode 4) ������������������������������������� 18


a market acceSS Scorecard ���������������������������� 19


commitments vs� demands �������������������������������������� 19
mutual recognition ����������������������������������������������������� 20
competition policy disciplines ��������������������������������� 20
trade-related capacity building ������������������������������� 21


concluSion ���������������������������������������������������������������� 21


chaPter ii 25


booStinG exPort comPetitiveneSS in
Ghana������������������������������������������������������������� 25


caSe Study executive Summary ����������������������� 26


innovative trade facilitation ��������������������������� 27


the private sector umbrella body ���������������������������� 27
export-led growth through customs reform ������������ 27
an electronic community network���������������������������� 27


overcominG challenGeS ������������������������������������ 28


choosing the right partners �������������������������������������� 28
Selling the project ������������������������������������������������������ 29


makinG leGal and reGulatory chanGeS ����� 29


addressing technical aspects ���������������������������������� 30


oPeratinG the Project ������������������������������������������ 30


managing change ������������������������������������������������������ 31


Project achievementS ����������������������������������������� 32


Simplifying customs procedures ����������������������������� 32
clearing goods faster ������������������������������������������������ 32
facilitating transit with a satellite tracking
system �������������������������������������������������������������������������� 32
increasing revenue collection ���������������������������������� 32
improving export competitiveness ��������������������������� 33


SucceSS factorS ��������������������������������������������������� 33


Government support �������������������������������������������������� 33
credible partners ������������������������������������������������������� 34
Project–specific infrastructure ���������������������������������� 34




vi


a phased approach ���������������������������������������������������34
Tangible benefits ��������������������������������������������������������35
training, sensitization and capacity building ��������35
responsiveness to emerging trends �����������������������35
Sustainable self-financing ���������������������������������������35


imPlementation challenGeS������������������������������36


overcoming individual and institutional resistance
��������������������������������������������������������������������������������������36
ensuring compliance �������������������������������������������������36
upgrading processes in other agencies ����������������36
Assuring confidence and ensuring security �����������36


concluSion ����������������������������������������������������������������37


chaPter iii 41


thailand’S SucceSSful journey �������41


caSe Study executive Summary �����������������������42


thailand’S reSPonSive Policy
environment ��������������������������������������������������������������43


Setting the stage for industrial growth �������������������43
economies of scale ����������������������������������������������������44


from imPort SubStitution to Global
inteGration ����������������������������������������������������������������44


induStry evolution ������������������������������������������������45


chanGinG dynamicS of Production �������������46


export trends and patterns ��������������������������������������48


the induStry’S GrowinG role in the
economy ���������������������������������������������������������������������49


thailand’S PoSition in Production
networkS ��������������������������������������������������������������������51


linkages: assembler and parts suppliers �������������51


what drove thailand’S SucceSS? �������������������53


Global shifts in the industry ��������������������������������������53
favourable, stable policy environment �������������������54
domestic market size matters ����������������������������������55


concluSion ����������������������������������������������������������������55


annex i: chartinG trade and inveStment
PolicieS 1960-2008 ������������������������������������������������������������57


annex ii: the evolution of the denSo
affiliate in thailand, 1973-2005 ���������������������������58


chaPter iv 61


GrowinG with Global Production
SharinG in malaySia ��������������������������������61


caSe Study executive Summary �����������������������62


the riSe of Global Production �����������������������62


PenanG’S oriGinS aS an exPort hub ���������������63


Policy reformS revitalize the economy ����63


national – local coordination �����������������������������������64
free trade zones, industrial states and
infrastructure development ���������������������������������������65
investment promotion ������������������������������������������������65
forging mne-Sme links ���������������������������������������������66
vocational training programmes �����������������������������66
lessons from failed projects �������������������������������������68


evolution of the exPort hub ����������������������������68


ancillary industries emerge ��������������������������������������69
from semiconductors to consumer electronics
and computer peripherals ����������������������������������������71


PenanG weatherS Global chanGeS ���������������72


moving into high-value tasks ������������������������������������72
diversifying product lines ������������������������������������������73
considerable prospects for expansion �������������������73


inveStment trendS and comPany
ProfileS �����������������������������������������������������������������������74


exPort Performance ��������������������������������������������78


a vibrant induStrial centre with economy-
wide imPact ����������������������������������������������������������������80


concluSion ����������������������������������������������������������������85


annex: SourceS and methodoloGy ���������������87


chaPter v 91


creatinG inteGrated textile ParkS in
india ����������������������������������������������������������������91


caSe Study executive Summary �����������������������92


market trendS ����������������������������������������������������������92


Sluggish growth����������������������������������������������������������94




vii


eSSentialS for inteGrated textile ParkS ��� 95


financing ��������������������������������������������������������������������� 96
Shared infrastructure, facilities and costs �������������� 96
implementation through public-private
partnerships ���������������������������������������������������������������� 96
Project management ������������������������������������������������� 97
administrative mechanisms ������������������������������������� 97
the role of state governments ��������������������������������� 97


PochamPally handloom Park ��������������������������� 97


More profits for producers ���������������������������������������� 98
Strategies for success ����������������������������������������������� 99


brandix india aPParel city ���������������������������������� 99


a foreign direct investment showcase ������������������ 100
Government infrastructure ������������������������������������ 100
Park infrastructure ��������������������������������������������������� 100


concluSion �������������������������������������������������������������� 100


a replicable model ��������������������������������������������������� 100


tableS


table 1: Strengthening the effectiveness of private sector
development activities ����������������������������������������������������������3


table 2: main elements of the cariforum access requests
on tourism �����������������������������������������������������������������������������17


table 3: highlights – tourism market access commitments to
cariforum in the ePa ������������������������������������������������������19


table 4: Production capacity (units) of thai car assemblers,
1989-2006 ������������������������������������������������������������������������������46


Table 5: Production capacity of carmakers classified by type
of vehicles, 2006 �������������������������������������������������������������������47


table 6: world motor automobile production – top 20
producing countries, 2000 and 2008 ���������������������������������48


Table 7: Automobile exports and imports classified by vehicle
type, 1999-2007 ���������������������������������������������������������������������50


table 8: direction of automobile exports from thailand,
1999-2007 (%) ������������������������������������������������������������������������50


Table 9: Automobile (CBU) production in Thailand classified
by carmakers, 2000 and 2008 ��������������������������������������������52


table 10: domestic automobile sales in indonesia, malaysia,
the Philippines and thailand, 1980–2005 �������������������������56


Table 11: Domestic vehicle sales in Thailand classified by
vehicle type, 1990-2008 �������������������������������������������������������56


table 12: branch plants of multinational enterprises operating
in Penang, 1970-2004 �����������������������������������������������������������74


table 13: approved investment in Penang, 1980-2008 ��������������������75


Table 14: Ownership structure of manufacturing firms in
Penang, as of august 2008 �������������������������������������������������75


table 15: top 25 foreign enterprises in Penang: employment
and product lines, as of august 2008 ��������������������������������76


table 16: top 25 local enterprises in Penang,
as of august 2008 �����������������������������������������������������������������77


Table 17: Home-country profile of foreign firms
in Penang, 2007 ��������������������������������������������������������������������79


table 18: merchandise exports from Penang – value,
composition and share of total malaysian exports ���������79


table 19: Penang’s manufactured exports: composition, export/
output ratio and foreign firms’ share in exports, 2005 ����81


table 20: Per capital GdP in malaysia and malaysian States
and federal territories ���������������������������������������������������������82


table 21: mean monthly gross household income and
incidence of poverty, 2004 and 2009 ���������������������������������83


table 22: composition of GdP and employment in Penang,
1970-2008 ������������������������������������������������������������������������������83


table 23: foreign-ownership in malaysian manufacturing –
Penang in the national context, 2005 ��������������������������������84


table 24: manufacturing employment, capital per worker, labour
productivity and average wage/salary: Penang in the
national context, 2005 ���������������������������������������������������������84


table 25: Scope of indian textiles and clothing industry,
2000-2009 ������������������������������������������������������������������������������93




viii


fiGureS


figure 1: Policy desirability and administrative and political
feasibility ���������������������������������������������������������������������������������5


figure 2: real growth rate of the tourism industry, 2001-2007 �������14


figure 3: before and after – Streamlined processes save time�����31


figure 4: revenue grows at kotoka international airport,
2002-april 2008 ���������������������������������������������������������������������33


figure 5: volume of vehicle production and share of vehicle
exports, 1961-2008 ���������������������������������������������������������������47


figure 6: Share of automotive exports in total merchandise
exports from thailand, 1990 to 2008 ���������������������������������49


figure 7: automobile exports from thailand, 1990-2009 ����������������49


figure 8: Pattern of regional division of labour of the automotive
industry in Southeast asia ��������������������������������������������������52


figure 9: manufactured exports from Penang: value and
share in malaysian exports, 1990-2009�����������������������������78


figure 10: value, volume and price indices of electronics
exports from malaysia, 1997-2009 �������������������������������������80


figure 11: malaysian patent registration: Selangor, Penang and
other states, 1976-2006 ��������������������������������������������������������85


figure 12: Growth performance of textiles and clothing sector,
2001-2008 ������������������������������������������������������������������������������93


figure 13: yarn production, 2000-2008 ������������������������������������������������93


figure 14: cloth production, 2000-2008 �����������������������������������������������94


figure 15: Production of ready-made garments, 2000-2008 �������������94


figure 16: Share of textiles and clothing in india’s total exports,
2000-2009 ������������������������������������������������������������������������������95


figure 17: job creation - Pochampally’s three-stage strategy ���������98


boxeS


box 1: Public-private cooperation improves malaysia’s
business environment �����������������������������������������������������������8


box 2: highlights of the private sector trade team’s market
access requests on tourism �����������������������������������������������16


box 3: wto modes of supply ���������������������������������������������������������16


box 4: before and after Gcnet: clients see the difference ��������30


box 5: Gcnet – geographic coverage �����������������������������������������34


box 6: the ftz incentive package ������������������������������������������������66


box 7: the Penang Skill development centre – excellence in
training to supply multinationals ���������������������������������������67


box 8: intel’s vendor development programme ��������������������������69


box 9: eng teknologi holdings berhad: from backyard
workshop to multinational corporation�����������������������������70


box 10: lkt industrial berhad: from humble foundry to
contract manufacturing ������������������������������������������������������71


box 11: Pochampally handloom Park – accomplishments ���������99




ix


abbreviationS


The following abbreviations are used:


ACP African Caribbean Pacific
ATC Agreement on Textiles and Clothing


AMD Advanced Micro Devices


ASEAN Association of Southeast Asian Nations


PSTT Barbados Private Sector Trade Team


BOI Board of Investment


BIAC Brandix India Apparel City


CRNM Caribbean Regional Negotiating Machinery


CARICOM Caribbean Community


CHTA Caribbean Hotel and Tourism Association


CPC Central Product Classification
CBU Completely built units


CKD Completely knocked down


CEPS Customs Excise and Preventive Service


EPA Economic Partnership Agreement


EDI Electronic data interchange


EU European Union


FDI Foreign direct investment


FTAs Free trade agreements


FTZs Free trade zones


GATS General Agreement on Trade in Services


GM General Motors


GCNet Ghana Community Network Services Limited


GPHA Ghana Ports and Harbours Authority


GSC Ghana Shippers’ Council


ICT Information and communications technology


ITP Integrated textile park


IFC International Finance Corporation


ISO International Organization for Standardization


ITC International Trade Centre


LEDs Light-emitting diodes


LCR Local content requirement


MIDA Malaysian Industrial Development Authority


MDGs Millennium Development Goals


MFN Most favoured nation


MFA Multifibre Arrangement
MNEs Multinational enterprises


MRA Mutual Recognition Agreements


OEM Original equipment manufacturer


PDC Penang Development Corporation


PSDC Penang Skills Development Centre


PCBA Printed circuit board assembly


PAC Project Approval Committee


PMC Project management consultant


PPD Public-private dialogue


PPPs Public-private partnerships


SITP Scheme for Integrated Textile Parks


SMEs Small and medium-sized enterprises


SERI Socio-Economic and Environmental Research
Institute


SGS Société générale de surveillance


SPV Special purpose vehicle


SITC Standard International Trade Classification
WTO World Trade Organization




©
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to
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o




introduction
public-private collaboration for export
success


the united nations and private sector development ������������������������������������������������������������������������� 2


public-private dialogue in trade policy is critical ������������������������������������������������������������������������������ 3


towards a balanced approach ����������������������������������������������������������������������������������������������������������������������� 4


challenges to effective public-private dialogue �������������������������������������������������������������������������������� 6


pre-requisites for dialogue ���������������������������������������������������������������������������������������������������������������������������� 7


five country cases ���������������������������������������������������������������������������������������������������������������������������������������������� 7




INTRODUCTION2


introduction
Public-Private collaboration for exPort SucceSS


The world’s pressing problems are far too complex and
resource-intensive to be addressed by the public sector
alone. It is now widely recognized that a healthy, vibrant and
competitive private sector is vital to ensuring growth and
reducing poverty. The private sector has the potential to be
an engine for economic growth, improving individual well-
being in all countries.


This is a significant shift in development thinking and
practice. However, institutional responses at the national
level to harness the potential of the private sector and
include it as a development partner are still evolving.


Until recently, mainstreaming this approach into the
development approaches of national governments,
donor governments and multilateral organizations has
been limited. The United Nations supports private sector
development, particularly as a fundamental way to advance
the Millennium Development Goals (MDGs).


ITC commissioned five case studies to showcase the
successful experiences of public-private collaboration in
developing countries. Some case studies outline activities
driven by governments and targeted at private sector
players in the form of public-private partnerships for service
delivery and public-private consultative bodies.


Other initiatives are driven by private sector players and
targeted at public sector players in the form of business
advocacy. In some instances, public-private dialogue has
resulted in highly successful public-private partnerships,
as in the case of Ghana where the private sector is a
shareholder in an initiative to integrate customs services.


The cases cover from the following countries and sectors:


ƒ Barbados – tourism;


ƒ Ghana – customs services;


ƒ Thailand – automotive industry;


ƒ Malaysia – sourcing multinationals;


ƒ India – textiles.


the united nationS
and Private Sector
develoPment


“Poverty is something that no one should
endure. Markets can flourish only in societies
that are healthy. And societies need healthy
markets to flourish. That is why we have to
boost our private-public alliance. We need to
bring knowledge, resources and innovation
together in a way that links sustainability with
opportunities for growth.”


Ban Ki-moon, United Nations Secretary-General


These remarks by the UN Secretary-General on the
occasion of the First Private Sector Forum on the Millennium
Development Goals in 2008 emphasized a shift in thinking
at the UN level that had begun much earlier. To track the
origins of this shift it is useful to draw upon earlier events.


The international community established the MDGs in 2000
to eradicate poverty. They outlined new roles for the private
sector, primarily as:


ƒ An engine of improved economic growth;
ƒ A means to generate the required domestic resources


for investments in human resource development through
health, infrastructure and education;


ƒ A potential provider of some of these essential services;
ƒ A direct partner in trade and technology transfers.


The UN Millennium Project recommended that each
government collaborate with the private sector to design a
development strategy to help create a favourable business
environment. Government actions are essential to creating
an enabling environment for public sector development
that diminishes the risks, lowers the costs and barriers, and
raises the rewards and opportunities for competitive and
responsible enterprises.


In July 2003, to respond to the slow progress made on
achieving the MDGs, then UN Secretary-General, Kofi
Annan requested a Commission on the Private Sector and
Development as a fundamental way to advance the MDGs.
He noted:




INTRODUCTION 3


“Our experience has shown that a large
part of the work for development is about
preparing the ground for sufficient private
sector activity to provide the jobs and income
needed to build a more equitable and
prosperous society.


Yet, the UN has only sporadically tapped the
power that can be drawn from engaging the
private sector in the work of development.”


The Commission was tasked to answer two fundamental
questions: ‘How can the potential of the private sector and
entrepreneurship be awakened in developing countries?’
and ‘How can the existing private sector be engaged in
meeting that challenge?’


The Commission created a conceptual framework and a
series of activities. Although the conceptual framework was
not specifically designed for the trade and development
context, it is very relevant (see table 1). The Commission
promotes a new type of alliance between large and small
companies, between public and private actors, between
foreign and domestic entities, and between commercial
and social investors. Activities can be driven by public
actors (local governments, donor governments and
development agencies) and private actors (companies, civil
society organization and foundations) in three fundamental
spheres:1


ƒ The public sphere, promoting the reform of laws,
regulations and other barriers to growth;


ƒ The public-private sphere, facilitating cooperation and
partnerships between public and private players to
enhance access to such key factors as financing, skills
and basic services;


ƒ The private sphere, encouraging the development of
business models that can be scaled up and copied and
that are commercially sustainable.


The activities detailed in table 1 are based on the
foundations of private sector development: the global
and domestic macroeconomic environment; physical and
social infrastructure and the rule of law; and the pillars of
entrepreneurship – access to finance, skills and knowledge.
This necessitates reforming laws, regulations and other
barriers to growth; facilitating cooperation and partnerships
between public and private players to enhance access to
productive resources; and encouraging the development
of business models that can be successfully replicated
and that are commercially sustainable. As stated in the
Unleashing Entrepreneurship report:


“Most of the recommended actions involve
more than one of the actors working together.
Where governments are implementing policy
change, it is often with the direct support
and involvement of multilateral development
institutions.


Where the private sector is taking a more
active stance on sustainable development,
it is often with civil society raising the
profile of this issue. Where governments are
implementing regulatory reform, it may be in
direct consultation with representatives of the
private sector.”


Public-Private dialoGue in
trade Policy iS critical
Private operators alone cannot achieve optimal allocation
of resources and state actors may not be able to address


Table 1: Strengthening the effectiveness of private sector development activities


Targeted at public
sector players


Targeted at private
sector players


Driven by private sector players


ƒ Companies
ƒ Civil society organizations
ƒ Foundations


Setting broader standards (industry
norms, sustainability, corporate
governance)


ƒ Lobbying for policy changes
ƒ Promoting participatory processes


through social dialogue


ƒ Business linkages and partnerships
ƒ Investment, including foreign direct


investment (FDI)


ƒ Mentorship for entrepreneurs


Driven by public sector players


ƒ Local governments
ƒ Donor governments
ƒ Development agencies


ƒ Policy reform
ƒ Policy advice
ƒ Funding and delivering technical


assistance for public sector reforms


ƒ Financial transfers (aid, loans)


ƒ Public-private partnerships, for
example, for basic service delivery


ƒ Public-private consultative bodies
ƒ Privatization or contracting
ƒ Investment promotion
ƒ Direct business development services
ƒ Direct financing


Source: Unleashing Entrepreneurship (Commission on the Private Sector and Development, UNDP, 2004). Available at: http://www.undp.org/
cpsd/documents/report/english/fullreport.pdf.




INTRODUCTION4


market failures on their own. Effective public-private
dialogue can address failures in government policy
designed to overcome market failures. It can also reduce
policy uncertainty, promote innovation and create wealth.


Effective public-private dialogue takes place within a
structured mechanism at the highest level of government.
The objective is to facilitate the reform process by involving a
balanced range of public and private sector actors. In 2010,
the case for collaboration between the private sector and
government in socio-economic development was summed
up by economist Dirk Willem te Velde, Programme Leader
of the Investment and Growth Programme at the United
Kingdom’s Overseas Development Institute:2


“There are market failures (the market alone
cannot achieve an optimal allocation of
resources) and there are government failures
(state actors may not be able to address
market failures on their own). Effective
business and government interaction can
address such market and coordination
failures and government failures through
cooperation, and can reduce policy
uncertainty.


When the state and business interact
effectively, they can promote more efficient
allocation of scarce resources, conduct more
appropriate trade policies and regulations,
remove the biggest obstacles to trade and
create wealth more efficiently.”


towardS a balanced
aPProach


For markets to work efficiently and deliver desired outcomes,
an effective government is needed to create an enabling
environment, provide public goods such as infrastructure,
and mitigate negative externalities, such as pollution and
other harmful environmental effects.


A further challenge in many countries is to enhance
transparency and accountability in the design and
implementation of policies aimed at fostering private sector
development to ensure that private sector-led growth can
benefit society as a whole.


Today, many governments are anxious to demonstrate that
they are responding to business by creating an enabling pro-
business environment to boost investment and economic
activity. Because regulation is needed in some instances,
many governments are increasingly seeking the advice of
the private sector.


ITC supports public-private dialogue because it is the
foundation of business advocacy in trade policy. Through
business advocacy, business organizations aim at
influencing government and policies and become an
integral part of the legitimate and democratic process
of policymaking in developing countries and emerging
markets.


In terms of optimizing effective public-private interactions,
there exist considerable differences between countries.
Some have been more adept and able to overcome
negative perceptions of private sector involvement, such
as rent-seeking and collusive behaviour. Others have been
less inclined or adept at engaging with the private sector.
The case studies presented in this book showcase some
successful experiences of public-private interaction.


Effective public-private dialogue leads to mutually beneficial
collaboration between the government and the private
sector. Public-private dialogue can lay a foundation for
public-private collaboration and public-private partnerships.


SuStainable conStituencieS for
trade Policy and reGulatory
reform


Policy reforms are the most tangible benefits of public-private
dialogue. These can include new legislation, amending or
scrapping of existing legislation, removing or simplifying
regulations and controls, standardizing procedures across
different jurisdictions and establishing new institutions.


While the structured consultation of a public-private dialogue
mechanism can have an immediate effect in improving
the quality of particular reform efforts, its deeper benefit
lies in building a sustainable constituency for trade policy
and regulatory reform. The increased transparency and
participation in the trade policy processes is recognized
as enhancing trust and confidence in the process, which
in turn facilitates implementing trade policy and regulatory
decisions. Some of the main benefits of such dialogues are
summarized below.


broadeninG Good Policy oPtionS


The World Bank’s Public-Private Dialogue Handbook3
notes that public-private dialogue can contribute to the
policy, administrative and political feasibility, or the political
economy, of reform issues. According to the World Bank,
the political economy of the reform process depends on
three related elements:4


ƒ Policy desirability – the political interest of the government
in investing efforts in reforms, depending on factors such
as commitment of the leadership, configuration of political
factions, upcoming elections, advocacy by private sector
and civil society organizations, the macroeconomic
situation, etc.




INTRODUCTION 5


ƒ Administrative feasibility – the institutional capacity
to develop and manage public institutions within the
framework of public sector reform processes.


ƒ Political feasibility – the coherence of the framework of
different reform processes and the institutional capacity
to manage reform processes.


As the World Bank Handbook suggests:5


“PPD [public-private dialogue] can contribute
to all three elements. Its main impact is likely
to be on raising the importance of issues on
the government’s agenda and building a
constituency for reform, and thus increasing
the policy desirability and feasibility of these
reforms.


Through government participation in
PPD, officials are exposed to exchange
of experiences that contribute to capacity
building within the public sector. However,
additional efforts are needed to build
capacity for public sector reform processes.”


The relationship among these three elements is shown in
figure 1.


inSiGhtS from the buSineSS
PerSPective


Governments that recognize the constraints faced by the
private sector tend to develop reasonable prioritization
plans and workable reforms. Trade policy decisions and
negotiation strategies refined through a consultative


process that engages legislatures, business groups and
civil society are frequently more effective. This dialogue
ensures that trade policies are better attuned to the
commercial environment, which makes the policies more
broadly endorsed and sustainable.


Public-private dialogue can help government tap into the
experience of firms, a potentially valuable resource for
designing public policies. The effectiveness of economic
policies would be significantly enhanced if the private
sector could provide policymakers and bureaucracies with
the information they need to anticipate the likely impact of
policy changes.


There are myriad different sectors, approaches and actors
that governments could choose to prioritize for assistance
and policy reforms. Governments must determine which
sectors and regulatory reform issues are the major stumbling
blocks to effective trade, and devise plans accordingly.
Collaborating with the private sector gives policymakers the
information they need to set priorities.


enSurinG credibility and SuPPort
for Policy reform


Public-private dialogue is a tool that government can use
to change the private sector’s perception of policy, gain
credibility, share information and establish a reputation for
favouring private sector development. Governments that
pay attention to the private sector are better placed to design
and execute credible and effective reform programmes.
Entrepreneurs who are involved in the reform process will
be more inclined to support policy reforms.


Through active engagement with the private sector, greater
consensus about and ownership and credibility of policy


Figure 1: Policy desirability and administrative and political feasibility


Adminis-
trative
feasibility


Policy desirability


Political
feasibility


B


A


C


Administrative
feasibility


Policy desirability


Political
feasibility


B
A


C


D
D


Capacity building Reform management


Learning about good practice


Source: The Public-Private Dialogue Handbook: A toolkit for business environment reformers, World Development Report 2005, World Bank, 2005.




INTRODUCTION6


reforms and negotiating positions can be obtained. This
builds trust and enhances the capability and credibility of
policymaking. The Organisation for Economic Co-operation
and Development reports that in Mexico, consultative
bodies linked to the Economic Solidarity Pact (a stabilization
programme in late 1980s) helped in the 1990s to move
from a situation of mutual suspicion to ‘generate greater
understanding, trust and networking’ between government
and top business leaders.6


An effective public-private dialogue process can make
government aware of the impact of reforms on the ground,
as well as generate greater awareness of the changes.
There must be a clear structure in place:7


“Without the structure imposed by public-
private dialogue, business advocacy tends to
find a narrower outlet: one sector lobbies for
a specific reform, which then has unwelcome
effects in other sectors, which lobbies for its
reversal, and so on.


The monitoring and evaluation systems put in
place by a [public-private dialogue] initiative
promotes a culture of compliance and entice
governments to perform regulatory impact
assessments.”


challenGeS to effective
Public-Private dialoGue


The context for public-private sector dialogue influences the
quality and outcome of dialogue greatly. Many developing
countries have weak public and private sector institutions,
absence of a culture of consultation and inclusiveness,
rivalries among private sector institutions, and in some
cases, lack of representation. These lead to four challenges
for effective dialogue:


ƒ Reinforcing vested interests. Public-private dialogue
creates both an opportunity and a risk when other lines
of communication between government and society are
weak. Done poorly, public-private dialogue can result
in an unhealthy influence by an unrepresentative group
of stakeholders, reinforce links between politicians and
lobbyists, and provide a veneer of legitimacy for bad
policies.


ƒ Speaking with one voice. In many countries the private
sector is not well-organized and does not speak with one
voice. Not all private sector interests can be reconciled,
as views may be fundamentally opposed depending on
the issues. However, there is still an urgent need to come
together and speak with a coherent and unified voice.


ƒ Fair and broad representation. The process of
consultation is a means of generating consensus on
public policy. Broad representation is an effective means


of overcoming vested interests that undermine the
process.


ƒ Negative attitudes to dialogue. Successful dialogue
depends on the mindset and capacity of the participants.
In particular, the attitude of the public sector can promote
or destroy the public-private dialogue process. The
highest-level government officials must encourage and
participate in such dialogues. Effective communication is
the key to any meaningful dialogue process.


Business advocacy is typically resource-intensive and
technical in nature. It involves engaging members to gather
information, identifying concerns, conducting analysis,
reconciling different interests and initiating appropriate
follow-up action with the government. However, in many
developing countries, in particular the least developed
among them, business associations typically have low
levels of financial and human resources, which adversely
impacts on their ability to meaningfully participate in trade
policy development.


A lack of funding often prevents business associations from
developing the required level of technical and sophisticated
knowledge on trade policy and negotiations issues to
engage effectively with government agencies. Other
challenges include:


ƒ Short-term perspective. Returns on business advocacy
in trade policy must be considered within a long-term
perspective. Industry leaders in developing countries
often have a short-term view.


ƒ High risk. Returns on business advocacy are more risky
in developing countries due to political instability, lack
of transparency and lack of a participatory approach to
trade policymaking.


ƒ Resistance to change. Resistance to change is partly due
to the lack of awareness and knowledge of the benefits
of change to the status quo. The process of globalization
can exacerbate feelings of insecurity and threat.


ƒ Lack of economies of scale. The potential benefits
of lobbying in trade policy tend to be lower for the
developing country industries, especially for small and
medium-sized enterprises (SMEs), due to the lack of
economies of scale.


The government needs political will and leadership to
engage. A strong commitment and a conscious effort by
the political leadership and senior civil service officials are
needed to encourage consultative processes and drive
their activities. Also critical is the will to reform. Without both
public and private champions investing in and driving the
process, it is difficult to sustain public-private dialogue and
achieve reforms.


In many cases, middle and lower level government officials
must be sensitized as to the importance of engaging with
the private sector. As the host, government must establish
a forum where robust dialogue and knowledge sharing are
supported. Champions from both the public and the private
sectors need to drive the dialogue, promote the concept,




INTRODUCTION 7


devote time and effort and give public-private dialogue
credibility, expertise and publicity.


Pre-requiSiteS for
dialoGue


A number of pre-requisites are required for effective
consultative mechanisms.


ƒ There should be political will to engage in serious
consultations. However, consultative mechanisms can
help build political will.


ƒ Participants in the process should be able to make
credible commitments.


ƒ Reform objectives should be well defined and specific.
ƒ Internal processes and procedures should be transparent


and participatory.
ƒ There should be an independent and adequately


financed secretariat to support the consultative process.
ƒ The consultative mechanism membership should be


authoritative and representative.
ƒ There should be follow-up procedures for monitoring


agreements.
ƒ The consultative mechanism objectives and activities


should be realistic about what is achievable in the
country’s economic, political and social context.


Box 1 outlines an excellent example of public-private
collaboration for export success.


five country caSeS


The case studies in this book describe different methods and
achievements of successful public-private dialogue.


In Barbados, the public and private sectors worked together
to ensure the country was able to secure better access
for its tourism service providers and investors under the
CARIFORUM-EU Economic Partnership Agreement (EPA).


In Ghana, public-private dialogue resulted in a public-private
partnership and a highly successful initiative to integrate
customs services. This resulted in boosting Ghana’s ratings
as a good place to do business and government tax revenues.


In Thailand, a business friendly, government-led industrial
development strategy has resulted in a parts and components
supplier network in the country, which impressively increased
local content in Thai-made cars.


The export production hub in the State of Penang, Malaysia,
provides a valuable laboratory for a study of government
policies and global sourcing strategies of multinational
enterprises (MNEs) in determining developmental gains from
global production sharing.


To revive the country’s declining textile industry, the
Government of India introduced the Scheme for Integrated
Textile Parks (SITP), designed to strengthen infrastructural
facilities in potential textiles growth areas with active
participation of the private sector. With the SITP, the
Government envisages India securing a 7% share in the
global textiles trade by 2012.


These cases provide a range of successful examples that
address many of the underlying concerns in laying the
foundations for successful trade. Readers can apply the
lessons of these cases to their own context.




INTRODUCTION8


* FMM’s membership represents about 20% of the companies engaged in Malaysia’s manufacturing sector. Generally, they are large
companies that account for about 75% of country’s industrial output.


Box 1: Public-private cooperation improves Malaysia’s business environment


The Malaysian example showcases the benefits of effective
public-private dialogue and cooperation.


The importance of trade in the Malaysian economy made
it imperative for the Government to create a business-
friendly environment. Recognizing the growing role of the
private sector in export-led economic growth, the Malaysian
Government decided it was crucial to view the private sector
as an important public sector partner to achieve economic
growth and prosperity.


In February 1983, the Government introduced the Malaysia
Incorporated concept to create a new and enhanced
relationship between the Government and the private
sector. This was an evolution over the previous system of
ad hoc and informal consultations between the Government
and the business community. The Malaysia Incorporated
concept institutionalized public-private sector collaboration.


The fundamental principle of Malaysia Incorporated is
that the public and private sectors believe that the nation
is a corporate entity, jointly owned by both sectors,
and that both are working in pursuit of shared goals.
The benefit of this cooperation for the private sector is
a higher level of profit leading to increased investment
and growth. The Government’s interest in the success of
Malaysian Incorporated includes generating employment
opportunities, economic development and increasing
revenue, which fuels social and economic development.


The introduction of Malaysia Incorporated has changed
the perception of a dichotomy between the roles of the
public and private sectors. The public sector, entrusted
with safeguarding public interest, has long emphasized its
regulatory role over the conduct and activities of the private
sector. Under the Malaysia Incorporated concept, the public
sector was required to redefine its role in relation to business
activities and to embark on new approaches to facilitate the
private sector’s role in driving economic development.


The Government established structural mechanisms
and issued several directives to facilitate public-private
cooperation and consultation through:


ƒ Establishing Consultative Panels in each Ministry/
Department/Office at federal, state and district levels;


ƒ Designating secretaries general, directors general,
state secretaries, and district officers as chairs of the
Consultative Panels, with membership comprising
representatives from both the public and private sectors;


ƒ Organizing regular meetings and an Annual Dialogue
Sessions with the private sector;


ƒ Identifying the Secretariat for the Consultative Panels in
each agency and designating an official to liaise with
members from the private sector;


ƒ Taking actions on matters discussed and decided upon
at Consultative Panel meetings.


The terms of reference of the Consultative Panels established
under this initiative include:


ƒ Simplifying rules, regulations and procedures related to
the activities of the public sector;


ƒ Preparing guidebooks to facilitate understanding of
rules, regulations and procedures;


ƒ Transparent decision-making process and reducing
discretionary powers;


ƒ The timely delivery of government services to the private
sector.


It took some time for government departments and agencies
to work closely with the private sector. This new approach
was not part of the work culture. Moreover, the policy was
not well understood or valued. At the same time, it did not
elicit the appropriate responses from both the public and
private sectors. Participants were less frank and candid in
their engagement. However, with greater appreciation of the
need for close cooperation, the environment improved over
the years.


Strong commitment and conscious efforts by the political
leadership and senior civil service officials to encourage
the Consultative Panels to invigorate their activities have
substantially contributed to effectively implement Malaysia
Incorporated. They urged civil servants to deliver high
quality services and to increase their interaction with
the private sector. This was complemented by specific
measures to intensify training of the middle and lower level
civil servants to enhance their understanding of the Malaysia
Incorporated concept and to change their mindset and
attitude. In addition, the planned, coordinated and coherent
manner in which the Government implemented the policy
contributed to its success.


The private sector recognized the benefits of this working
relationship and strongly supported the initiative. The
Federation of Malaysian Manufacturers (FMM*), an
umbrella organization of the manufacturing sector, played
a proactive role by providing critical feedback and inputs
to the Government on policy as well as operational issues.


FMM has provided an effective platform for the private
sector for sectoral consensus building and networking
based on consultation among its members. FMM’s
organizational and financial strength and the attention given
to professional development of its staff members greatly
contributed to FMM’s success in making maximum use of
the forum provided by Malaysia Incorporated.




INTRODUCTION 9


endnoteS


1. Unleashing Entrepreneurship (Commission on the Private Sector and
Development, UNDP, 2004). Available at: http://www.undp.org/cpsd/
documents/report/english/fullreport.pdf.


2. D. W. te Velde, Effective state-business relations, industrial policy and
wealth creation, in Effective State-Business Relations, Industrial Policy and
Economic Growth, (Overseas Development Institute, 2010).


3. Herzberg B. and A. Wright, The Public-Private Dialogue Handbook: A
toolkit for business environment reformers (World Bank, 2005).


4. Ibid.


5. Ibid.


6. N. Pinaud, Public-Private Dialogue in Developing Countries –
Opportunities and Risks (Organisation for Economic Co-operation and
Development, Development Centre Studies, 2007).


7. Ibid.


In February 2007 there was an important development in the
public-private sector partnership consultative mechanism.
The Government established the Special Taskforce to
Facilitate Business (PEMUDAH) to carry the spirit of
Malaysia Incorporated to a much higher level.


Reflecting the close working relationship between the public
and private sectors, PEMUDAH is co-chaired by the chief
secretary to the Government of Malaysia and the past
president of the FMM. The concept of co-chairmanship
is different as public sector officials chaired previous
forums. This reflects an even stronger commitment by
the Government to engage the private sector as an equal
partner.


PEMUDAH has been assigned a monitoring responsibility
to ensure that reforms are sustained and embedded in the
public delivery system. The PEMUDAH model is intended
to take public-private collaboration beyond the level of
dialogues that often achieve no more than discussing
issues of concern.


PEMUDAH’s mandate includes simplifying rules, regulations
and procedures, and enhancing transparency. However,
it also includes discussing policy issues for improving the
Malaysian business environment. A Permanent Secretariat
provides back-up support and monitors the progress of
implementing Task Force decisions.


Since its inception, PEMUDAH has leveraged the enhanced
public-private sector collaboration and successfully
implemented many initiatives and measures. Trade
facilitation is one such area in which notable progress has
been made over the past three decades to implement
reforms in customs policies, legislation procedures
and practices. These have significantly improved the
operating environment for business and boosted national
competitiveness.


Source: D. Supperamaniam, Public-Private Sector Collaboration for Improving the Business Environment in Malaysia (case study for Business
and Trade Policy programme), International Trade Centre, 2010.




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business advocacy wins
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a snapshot of tourism in barbados �������������������������������������������������������������������������������������������������������������13


business advocacy groups get organized ���������������������������������������������������������������������������������������������14


a better landscape for tourism services ������������������������������������������������������������������������������������������������18


a market access scorecard ����������������������������������������������������������������������������������������������������������������������������19


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CHAPTER I – BUSINESS ADVOCACy WINS MARKETS IN BARBADOS12


buSineSS advocacy winS
marketS in barbadoS
touriSm ServiceS liberalization under the
caribbean–euroPean union economic PartnerShiP
aGreement


caSe Study executive
Summary


This case study describes how the private and public sectors
of Barbados worked together to ensure the country was
able to secure better market access for its tourism service
providers and investors under the CARIFORUM-EU EPA.


CARIFORUM is the Caribbean Community (CARICOM),
comprised of 15 Caribbean Community states, together
with the Dominican Republic. The Economic Partnership
Agreements (EPAs) between the European Union and
African, Caribbean and Pacific countries are trade promotion
agreements that stem from the 2000 Cotonou Agreement,
and are tailor-made for specific regional circumstances.


In the EPA negotiations, Barbados achieved a significant
measure of success for the tourism sector. This case study
gives public officials involved in EPA negotiations a valuable
insight into the value of partnership with the private sector.
Private sector actors will better understand how the needs of
business and of the sector can be brought to the table and
yield results.


The case study also demonstrates the importance of public-
private collaboration in preparing negotiating positions for
international trade negotiations, the processes for effective
dialogue and the specific role of the private sector. This case
study also provides an analysis of the business opportunities
for the Barbados tourism industry under the EPA.


The conclusion of the EPA between the CARIFORUM
Group of the African Caribbean Pacific (ACP)1 states and
the European Union represents enhanced and new access
opportunities in the EU market for CARIFORUM investors and
service providers in the tourism industry. Barbados should be
one of the main beneficiaries of these trade gains given the
predominance of tourism and tourism-related activities in its
economy and the quality of its tourism-related infrastructure.


The EPA’s treatment of tourism services is notable for its
development cooperation provisions in areas such as
capacity building for environmental management, developing


Internet-based marketing strategies for small and medium-
sized tourism enterprises, as well as upgrading national
accounts systems to introduce tourism satellite accounts at
the regional and local level.


The negotiation of a free trade agreement between partners
of dramatically different economic sizes and capabilities
was no easy task. For success, the smaller negotiating
partner – Barbados – needed several elements, including:


ƒ A technically competent negotiating machinery;
ƒ A proactive government providing clear policy guidance


on negotiating strategy and positions;


ƒ Effective government communications with the private
sector;


ƒ Active private sector involvement based on a
sophisticated awareness of the implications of trade
policy for their businesses.


A key lesson emerging from the EPA negotiations is that
there is an increasingly important role for the private sector
in developing countries. Private sector actors are often best
placed to identify potential export opportunities, existing
barriers and the means to capitalize on the opportunities
opened up by trade pacts. A critical element in the negotiation
process is ensuring there are avenues for constructive
engagement between the private sector and government to
best fashion market access requests and offers.


Private and public sector interaction was an essential
element in ensuring that the country was able to secure better
market access conditions for its tourism service providers
and investors under the EPA than those afforded by the
World Trade Organization’s (WTO) General Agreement on
Trade in Services (GATS).


The case study documents the domestic tourism industry’s
positions, the interaction between stakeholders in the
tourism industry and the Government of Barbados and how
that interaction helped shape the tourism-related provisions
of the EPA. The process involved both national interaction
and regional dynamics. Important public-private interactions
took place at the regional level among actors such as the




CHAPTER I – BUSINESS ADVOCACy WINS MARKETS IN BARBADOS 13


Caribbean Regional Negotiating Machinery (CRNM), the
Caribbean Tourism Organization and the Caribbean Hotel
and Tourism Association (CHTA).


The CRNM, as far back as 2003, had undertaken much
of the preparatory work that enhanced the richness
of this interaction. The CRNM is the premier regional
body with a technical competence in trade. Barbados’
private sector representative agencies reconstituted their
research capabilities to meet the challenge of international
negotiations. Their preparatory work included:


ƒ Commissioning a seminal study that provided a
comprehensive assessment of the issues involved in
tourism negotiations;2


ƒ Working with the CHTA and the Caribbean Tourism
Organization to sensitize tourism stakeholders about the
trade issues through workshops within the region;


ƒ Addressing the CARICOM Ministers of Tourism and the
CARICOM Council for Trade and Economic Development;


ƒ In some cases, facilitating increased contact and co-
ordination between Ministries of Trade and Ministries of
Tourism.


The EPA negotiations represented an opportunity for service
suppliers in Barbados and the Caribbean to reap benefits
not achieved in the WTO, including:


ƒ Creating meaningful, innovative, market-opening rules
for the sector;


ƒ Establishing a common understanding on issues facing
the sector, such as in the areas of standards and anti-
competitive practices;


ƒ Creating mechanisms to make it easier for EU investors
to choose the Caribbean;


ƒ Strengthening the capacity of CARIFORUM operators
to increase tourism exports and the industry’s
competitiveness.


The success of the Barbados tourism stakeholders’
campaign to secure new market access opportunities in the
EU market can be attributed to:


ƒ Active engagement of the private sector in EPA
negotiations;


ƒ Use of business support organizations to convey
positions to the Government and the regional authorities;


ƒ Commitment of Government and the private sector to
have a constructive and cooperative working relationship
throughout the negotiations;


ƒ The ability of negotiators to successfully pursue the
interests of private operators.


a SnaPShot of touriSm in
barbadoS
Tourism is a mainstay of Barbados’ economy and its most
important services export.3 Barbados is one of the most


mature Caribbean tourism destinations. The country’s
tourism industry offers relatively diversified products,
including the long-stay visitor market and a growing cruise
ship segment. Stakeholders include a wide variety of
service suppliers ranging from the lower value-added end
to the premium end: car rental and coach operators, aircraft
catering, tour guides, travel agents and tour operators,
duty-free retailers and a variety of businesses that derive
significant revenues from the tourism industry, for example,
restaurants, retail shops, etc. Barbados has made significant
strides in creating niche tourism markets such as events-
focused cultural tourism, heritage tourism, sports tourism
and destination weddings.


Barbados faces increasing global competition. In the region,
Barbados faces fierce competition from destinations such
as Mexico, Cuba, the Dominican Republic and Jamaica.
The country’s main challenge is to maintain a high-quality
tourism product while adding value through the addition of
niche markets, such as health and wellness tourism, which
build on Barbados’ existing capacity base. As Barbados’
largest tourism markets are the United Kingdom, the United
States and Canada, the industry is particularly vulnerable to
economic downturns in any of these countries.


recent induStry Performance


From 2001 to 2007, the industry’s real growth rate averaged
1.47%. This slow growth rate is explained by the steep
declines experienced in 2001 and 2002 in the aftermath of
the 9/11 and 2005 terrorist attacks in the United States and
the United Kingdom and by modest rates of growth in 2006
and 2007, following robust growth in 2003 and 2004 (see
figure 2).


In 2007, Barbados received 1,189,291 tourist visits.4 Long-
stay tourists accounted for approximately 48.2% of this total.
Long-stay tourist arrival figures were boosted by Barbados’
hosting of some matches of the Cricket World Cup in April
2007. This figure represents a 1.8 % increase in long-stay
tourist arrivals over 2006. Cruise tourism represents an
increasingly important segment of the tourism market,
growing by 14.3% in 2007.5


The industry earned BDS$ 763.6 million (US$ 385.6 million)
in 2007, contributing 13.5% of real GDP.6 Visitor expenditure
in 2007 totalled BDS$ 2,400.2 million, an increase of 18.5%
compared with BDS$ 1,955.2 million the previous year.7 In
2007, the tourism industry directly employed an estimated
14,000, approximately 10.5% of the total labour force.8


The United Kingdom is the most important tourism market
for Barbados, accounting for 38% of total long-stay tourist
arrivals in 2007.9 The growth in arrivals from other European
countries has been less than impressive. Arrivals from
European destinations declined by 25.8% in 2006-2007.
Other major tourist markets such as the United States and
Canada continue to grow, recording increases of 2.1% and
7.7 %, respectively over the same period.




CHAPTER I – BUSINESS ADVOCACy WINS MARKETS IN BARBADOS14


buSineSS advocacy GrouPS
Get orGanized


Prior to 2003, various business support organizations
maintained a limited research capacity in trade and related
government policies. The private sector business support
organizations initiated a rationalization process. This
entailed carving out research capabilities from existing
business support organizations and grouping them under
a new entity – the Barbados Private Sector Trade Team
(PSTT). The PSTT was mandated to research, document
and promote private sector interests likely to be affected
in international trade negotiations.10 The main pillars of the
PSTT’s work include:


ƒ Evaluating the competitiveness of Barbadian businesses;
ƒ Assessing the impact of trade agreements;
ƒ Identifying new opportunities arising from a progressively


more liberal international trading environment.


The Barbados Hotel & Tourism Association (BHTA)
represents the interests of the private sector’s tourism
stakeholders. It played a limited role in the overall EPA
negotiations, providing support to the PSTT and the regional
industry association, the CHTA.11 The BHTA served as a key
link between the PSTT, the CHTA and tourism stakeholders.


The BHTA participated in PSTT tourism initiatives and
attended meetings of the CRNMs Technical Working
Group on Services. The BHTA also used opportunities
such as the Commonwealth-sponsored private-public
sector consultations in 2004 to make presentations aimed


at sensitizing policymakers about the peculiarities of the
tourism industry and to articulate specific market access
demands for the EPA, the WTO and the now-abandoned
Free Trade of the Americas Agreement.


The PSTT clearly viewed the EPA negotiations as an
opportunity for its members to secure new access
opportunities for its members in the European market. In its
2006 Information Paper, the PSTT stated:


“Tourism stakeholders in Barbados and the
region have requested that CARIFORUM
negotiators in their formal discussions with
the EU stress the importance of the tourism
sector to the economies of the region. Tourism
stakeholders in the private sector will be
looking to the EPA to address some of the
difficulties currently being experienced in the
tourism sector.


CARIFORUM countries expect the EPA to
provide significant economic benefits to the
Caribbean in terms of market access and
trade facilitation to enable mainly the small
service suppliers in the region to export for the
first time and/or increase exports to the EU.”12


The PSTT’s activities included encouraging tourism
stakeholders to lobby for their interests and formulating
positions and engaging in consultations with the Ministry of
Foreign Trade.


Figure 2: Real growth rate of the tourism industry, 2001-2007




-8


-6


-4


-2


0


2


4


6


8


10


12


2001 2002 2003 2004 2005 2006 2007


%
c


ha
ng


e


Source: Based on data from table I.2, Trade Policy Review: Barbados, World Trade Organization, 2008.




CHAPTER I – BUSINESS ADVOCACy WINS MARKETS IN BARBADOS 15


enGaGinG in Stakeholder advocacy


The PSTT encouraged tourism stakeholders to engage in
advocacy to secure their interests. It elaborated a three-
phase strategy to heighten the profile of tourism issues.13


ƒ The first phase entailed coordinating public and private
sectors at the national level. This called for increased
private sector involvement in the decision-making
process on trade liberalization issues. It placed the onus
on the private sector to understand the issues and convey
its needs to policymakers and national negotiators.


ƒ The second phase involved organizing the public
and private sectors at the regional level by creating
opportunities for dialogue at major regional tourism
conferences.


ƒ The third phase was organizing regional stakeholders
and negotiators at the international level and lobbying for
the tourism industry in the multilateral arena.


collaboratinG and formulatinG
PoSitionS


The PSTT was an important player in formulating positions
for the tourism industry. Together with BHTA, the PSTT
facilitated the process of identifying the tourism sector’s
offensive and defensive interests through a number of focus
groups in late 2004. Focus group participants included key
tourism stakeholders and a representative from the Ministry
of Foreign Trade.


The focus groups aimed at formulating private sector
positions on tourism issues for the negotiations with the EU,
as well as for upcoming negotiations with Canada and the
United States. Sub-sectors that were the subject of these
exercises included tour operators, tour guides and travel
agents; attraction and recreation services;14 aircraft catering
services; car and coach rental services; and duty-free
retail services. The stakeholders took an expansive view of
the tourism industry. Their focus groups and subsequent
requests included services not classified as tourism
services under Central Product Classification (CPC), the
worldwide product classification system of goods and
services published by the United Nations.


The focus group discussions provided the basis for the
national tourism stakeholders’ market access requests
to the EU. These requests were formally submitted by the
PSTT to the Ministry of Foreign Trade to incorporate into
Barbados’ collective requests and offers (see box 2). The
PSTT submission highlighted areas in which Barbadian
service providers expressed interest in gaining enhanced
access to the European market and requested removal of
specific barriers to tourism services exports. PSTT sought
market access to the EU in the above-mentioned sectors.


the Government reactS favourably


The Foreign Trade Division of the Ministry of Foreign Affairs
and Foreign Trade appeared to be satisfied with the private
sector’s initiatives on tourism trade issues. The Ministry
found that the business support organizations representing
the interests of tourism stakeholders were well informed and
had a clear idea of the industry’s defensive and offensive
interests.


The PSTT’s devotion of significant time and resources was
reflected in well-researched and structured submissions.
As a preliminary step, the Foreign Trade Division in the
context of Barbados’ EPA initial offers examined the PSTT’s
submission. CARIFORUM’s EPA offer was prepared on the
basis of the CARIFORUM states’ WTO offers (see box 2 and
table 2).


While the PSTT’s requests listed in box 2 appear somewhat
different from those of CARIFORUM described in table 2, there
is actually a high level of consonance between the two. The
PSTT’s request to remove all limitations to the establishment
of commercial presence is equivalent to CARIFORUM’s
request for the Czech Republic and Poland to remove their
restrictions as these were the only two European countries
that remained unbound in the EU’s conditional revised offer
at the WTO. One difference, however, is that CARIFORUM’s
request did not heed the PSTT’s request for the removal of
restrictions on the establishment of commercial presence
for tour guides services.


the role of the caribbean hotel and
touriSm aSSociation


Since 1962, the CHTA, sometimes referred to as the
Caribbean Hotel Association, has operated as an
independent, not-for-profit organization. The CHTA stands
out in terms of its active engagement in the negotiation
process and its role in coordinating the region’s tourism
sector. The pivotal role played by the CHTA is explained by
the national business support organizations’ confidence
that CHTA accurately reflected its interests and was able to
effectively articulate its demands.


The Barbados tourism industry’s perception that the
CHTA was a champion of its interests was also rooted in
the fact that the PSTT’s lead consultant on tourism issues
was recruited to the CHTA as its Industry and Advocacy
Manager for the EPA negotiations. This contributed to
a healthy cross-fertilization of ideas and strong lines of
communication among the BHTA, the PSTT and the CHTA.
The CHTA’s involvement in the EPA negotiations included:


ƒ Submitting a position paper in 2005 and a first draft of a
declaration/EPA Annex on tourism in 2006;


ƒ Encouraging the active engagement of its membership in
the negotiation process by emphasizing the importance
of trade issues for the industry;




CHAPTER I – BUSINESS ADVOCACy WINS MARKETS IN BARBADOS16


Box 2: Highlights of the private sector trade team’s market access requests on tourism


Travel agents, tour guides and tour operators


ƒ Travel agents
– Removal of all restrictions on cross-border supply
– Removal of all restrictions on the establishment of commercial presence
– Removal of restrictions on the movement of managers and key personnel of CARIFORUM operations as well as


independent self-employed travel agents
ƒ Tour operators


– Removal of all restrictions on cross-border supply
– Removal of all restrictions on the establishment of commercial presence
– Removal of restrictions on the movement of managers and key personnel of CARIFORUM operations as well as


independent self-employed tour operator professionals
ƒ Tour guides


– Removal of all restrictions on the establishment of commercial presence
– Removal of restrictions on the movement of managers and key personnel of CARIFORUM operations and provide for


movement of CARIFORUM tour guides


Lodging, food and beverage services


ƒ Lodging services
– Removal of all restrictions on the establishment of commercial presence
– Removal of restrictions on the movement of managers and key personnel


ƒ Food serving services
– Removal of all restrictions on the cross-border supply of catering services, including aircraft catering operations
– Removal of all restrictions on the establishment of commercial presence, including aircraft catering operations
– Removal of restrictions on the movement of managers and key personnel


Source: Submission of the Private Sector Trade Team to the Foreign Trade Division, 25 August 2005.


Box 3: WTO modes of supply


In terms of market access, the WTO distinguishes between
the following four modes of services supply:


ƒ Cross-border supply (Mode 1) covers services flows
from one customs territory into another. Typical examples
are services transmitted via telecommunications or mail.


ƒ Consumption abroad (Mode 2) refers to situations
where consumers move into another customs territory to
obtain services, as predominantly the case in the tourism
sector.


ƒ Commercial presence (Mode 3) implies that a service
supplier establishes a territorial presence in another
customs territory to provide a service, as for example in
the case of hotel chains.


ƒ Presence of natural persons (Mode 4) consists of
persons entering a foreign customs territory to supply
a service, as independent self-employed tour operators
may do on occasion.




CHAPTER I – BUSINESS ADVOCACy WINS MARKETS IN BARBADOS 17


ƒ Polling members to gauge their views on particular
issues;


ƒ Participating in the Caribbean Regional Negotiating
Machinery Technical Working Groups in Barbados and
Jamaica.


EPA tourism negotiations hit a low point in late 2007.15 This
deadlock seems to have been caused by opposing views on
the necessity of including separate and distinct disciplines
for the tourism industry within the EPA. While CARIFORUM
was firmly committed to including such disciplines, EU
negotiators appeared to deem them unnecessary. The
CHTA waged a public relations campaign highlighting
the importance of the tourism industry to the region and
generating some negative press for the EU, especially in
light of the significant asymmetries in the size and power of
the two regions.


The CHTA considers its campaign as one of the factors
contributing to the modification of the EU’s stance on
tourism issues. While the deadlock was eventually resolved
at the level of Chief Negotiators, this anecdote illustrates
that there is a unique role for private sector actors in
negotiations. Neither the CARIFORUM governments nor the
CRNM could have orchestrated such a media campaign
without prejudicing the negotiations.


The CHTA’s 2005 position paper articulated market access-
related demands in three areas:


ƒ Negotiation of a mutual recognition agreement (MRA)
with the EU to recognize and accept tourism qualifications
and credentialing programmes.


ƒ Enhancement of access to the EU for the temporary
entry of tourism professionals of all levels, as well as
for Caribbean hospitality students seeking access to
temporary work experience (Mode 4). Such access was
also sought for skilled and semi-skilled workers in the
culinary, food and beverage sub-sector.


ƒ Improved access to the EU market through cross-
border supply (Mode 1) of tourism services through
a review of EU legislation and standards applicable to
Caribbean hoteliers while cooperating with European
tour operators.19


Mode 1 encompasses direct marketing of CARIFORUM-
based hotel services via their own Internet platforms
and indirect marketing through Computer Reservation
Systems, such as Amadeus, Sabre, Galileo and
Worldspan. It also includes online booking engines and
Internet portals, including Hotels.com, Expedia and
Travelocity.


Currently, the number of bookings made directly with
Caribbean hotels is small. Computer Reservation
Systems, online booking engines and Internet portals
are the main distribution channels for the tourism
products. These are controlled by a few big international
companies. As a result, under Mode 1, CARIFORUM
hotel service providers’ have primarily indirect access
to EU tourist markets. Actual access to the EU market
may be restricted by the requirements of the few key
distributors.


Obtaining a Mode 1 commitment for hotels would mean
that the EU would not maintain any market access barriers
to CARIFORUM operators selling their services directly or
indirectly in the EU market via electronic media. Given
the marketing trend described above, the immediate
consequence would be to remove barriers that may arise
because of the dominance of the international booking
agencies.


With a Mode 1 commitment, there would be a legal basis
on which to challenge barriers to marketing CARIFORUM
tourism services. This should be considered in
conjunction with the anti-competitive provisions in the
EPA, which address the question of global suppliers that
have the capacity to materially affect the CARIFORUM
operator’s ability to participate in the market. This market
access plus the anti-competition provisions would
provide CARIFORUM with a stronger basis to compete
against unfair practices such as exclusivity clauses.


In the absence of a commitment,20 there is no legal basis
for contesting Mode 1 barriers to market access. Hence,
it is more difficult to make inroads into the market on the
basis of access only via CARIFORUM’s own Internet
marketing.


It is important to note that the EU Package Travel
Directive applies to the CARIFORUM hotels, whether
they market their services directly or indirectly to the EU


Table 2: Main elements of the CARIFORUM access requests on tourism


Sector Request to EU Member States by mode of supply


Hotels and restaurants including catering services CPC
641-64316


Mode 3: Remove limitations for Czech Republic and Poland for
CPC 643


Remove national treatment restriction for the Economic Needs
Test in Italy for CARIFORUM providers


Mode 4: Remove limitations for all Member States


Travel agencies and tour operators services CPC 7471 17 Modes 1, 3, 4: Remove limitations for all Member States


Tourist guides services Mode 4: Remove limitations for all Member States18


Source: CRNM, CARIFORUM Request to the European Communities.




CHAPTER I – BUSINESS ADVOCACy WINS MARKETS IN BARBADOS18


market. As indicated, the way in which some EU Member
States have implemented the Directive appears to have
been a barrier to Mode 1 access. In getting a Mode 1
commitment, CARIFORUM states may put the onus on
the EU Member States to ensure that the implementation
of the Directive does not create a barrier to Mode 1
access.


These demands, along with the other concerns of the
tourism stakeholders, were also incorporated into the CHTA/
Caribbean Tourism Organization’s draft text on tourism.


a better landScaPe for
touriSm ServiceS
The conclusion of the EPA between CARIFORUM and the
EU represents enhanced and new access opportunities
in the EU market for CARIFORUM investors and service
providers in the tourism industry. Barbados stands to be
among the main beneficiaries of these trade gains, given
the predominance of tourism and tourism-related activities
in its economy and the quality of its related infrastructure.


The Barbados private and public sector interaction was
an essential element in ensuring that the country was able
to secure better market access conditions for its tourism
service providers and investors under the EPA than those
afforded by the World Trade Organization’s GATS.


Both national interaction and regional dynamics took place.
Regional actors included the CRNM, the Caribbean Tourism
Organization and the CHTA.


market acceSS GainS


In the EPA negotiations that concluded in December 2007,
the EU made a number of commitments in the tourism and
travel-related services sector, namely in regard to hotels
and restaurants, catering services, travel agencies, tour
operators and tourist guide services (see table 3). Some
commitments were made for spa services as well as for other
services not classified as tourism services, but nonetheless
of interest to Barbados’ tourism services providers.21


The market access gains are discussed below in terms of
the four specific modes of supplying tourism services.22


The areas covered by the EPA are ‘shared competences’
between the EU and the Member States. As a result, not
all areas have been liberalized homogenously in the EPA.
A number of EU Member States opted out with regard to
specific supply modes in certain sectors.


croSS-border SuPPly and
conSumPtion abroad of ServiceS
(modeS 1 and 2)


The EU Member States were liberal in their commitments on
the provision of catering services through Mode 1, removing


all market access restrictions. However, a closer inspection of
the EU’s Mode 1 commitments suggests this gain may be of
limited value given the practical difficulty of supplying catering
services via Mode 1.23 The EU’s commitments for hotels
and restaurants reflect a far more restricted access regime.
Estonia, Finland and Hungary have removed their restrictions;
the remaining 24 EU Member States remain unbound.


CARIFORUM suppliers secured additional market access for
the Mode 1 cross-border supply of travel agency and tour
operator services, with only Bulgaria and Hungary opting
to maintain their restrictions. For tourist guide services, 17
Member States removed their market access limitations, while
Bulgaria, Cyprus, the Czech Republic, Hungary, Italy, Lithuania,
Malta, Poland, Slovakia and Slovenia remain uncommitted.


The EU places no limitations on Mode 2 trade (consumption
abroad) for any of the three tourism categories or for spa
services. As a result, Europeans can use these tourism and
spa services freely in CARIFORUM countries. However, such
commitments are of limited value as there were no barriers
to start with. CARIFORUM had sought to add value to these
commitments by requesting the portability of state funded
medical insurance benefits so that the costs of medically
mandated spa treatments are eligible for reimbursement for
EU citizens. However, this request met with little success as EU
negotiators considered such insurance schemes to lie beyond
the scope of the EPA.


commercial PreSence (mode 3)


The EU provided substantial market access for establishing
CARIFORUM commercial presence in tourism services.
For hotel, restaurant and catering services, all EU Member
States except Bulgaria and Italy have no restrictions on
commercial presence. Bulgaria requires incorporation and
Italy imposes economic needs tests.


For travel agency and tour operator services, only Bulgaria
and Portugal maintain limitations requiring incorporation or
maintenance of the firm’s corporate base in the host country.
There are no limitations on commercial presence in any EU
Member State for tourist guides services. In addition, there
are no restrictions on spa services.


temPorary PreSence of natural
PerSonS for buSineSS PurPoSeS
(mode 4)


The EU has committed to allowing investors to engage key
personnel and graduate trainees for every service sector
liberalized under the EPA, subject to some country specific
limitations. The temporary entry and stay of key personnel
and graduate trainees will be for up to three years for intra-
corporate transfers, 90 days in any 12-month period for
business visitors, and one year for graduate trainees. Only
Bulgaria has maintained limitations in these categories. In
Bulgaria, the number of foreign managers cannot exceed




CHAPTER I – BUSINESS ADVOCACy WINS MARKETS IN BARBADOS 19


that of local managers where the state/municipal share in
equity in a Bulgarian company is greater than 50%.


With respect to tour guides services, 15 Member States
removed their limitations to the movement of these
professionals. The other 12 Member States have maintained
nationality requirements that nullify the partial access
otherwise granted. Nationality requirements also apply to
key personnel and graduate trainees across the EU for spa
services.


As regards commitments on contractual service suppliers,
the EU remains unbound for hotel, restaurant and catering
services as well as for spa services. The EU was more liberal
for travel agency services: 14 Member States scheduled no
limitations for this category of professionals, 12 Member
States applied economic needs test and Ireland remained
unbound.


A similar picture emerges for tour operator services including
tour managers, although Ireland has made a commitment
to allow contractual service suppliers entry solely for tour
managers. For tour guides services, there is a much lower
level of commitment. Only Sweden agreed to remove its
market access limitations, whereas 21 Member States
impose economic needs tests and the remaining five have
not undertaken any commitments. The EU did not make an
offer on the temporary entry of independent professionals in
any of the three tourism sub-sectors.


a market acceSS
Scorecard


commitmentS vS� demandS


Comparing the PSTT’s requests to the results in the EPA, it
is clear that Barbados’ tourism stakeholders secured much
of what they sought to achieve. 24


For catering, travel agency, tour operator and tour guide
services, the EU Member States provided a significant level
of Mode 1 access with the level of commitments ranging
from as high as all 27 Members States to a low of 17.25 This
was clearly a favourable outcome for Barbados’ service
providers. The PSTT had not requested any Mode 1 market
access commitments for hotel services, as these were not
considered to be technically or commercially feasible. With
respect to food serving services, the PSTT’s request was
limited to catering services (CPC 6423). As a result, the lack
of EU commitments for restaurant services is presumably
not problematic.


In terms of the commercial presence commitments,
the EU was very liberal with 25 Member States making
commitments in all of the scheduled tourism sub-sectors as
well as for spa services. Barbadian tourism service providers
can be relatively content on this score. While the PSTT had
included aircraft catering in its general catering services
request, such a service is properly classified as a service
auxiliary to air transport services.26 In its commitments in the
latter sub-sector, the EU scheduled a reservation limiting
categories of activities to the size of the airport, stipulating
that the number of providers in each airport can be limited
due to space constraints, but they have to be at least two to
maintain some competition. In addition, Bulgaria imposed
an incorporation requirement. From the PSTT’s perspective,
such access, even if limited, is a positive outcome.


As measured against its requests, Barbados gained
significant market access for key personnel and graduate
trainees in the hotel, restaurant and catering services
sectors, as well as travel agency and tour operator services,
with 26 Member States making full commitments; Bulgaria
scheduled a partial commitment. In terms of the gains on
contractual service suppliers, the PSTT only requested
that the EU allow temporary entry of tour guides. There
was some measure of success as Sweden fully opened its


Table 3: Highlights – Tourism market access commitments to CARIFORUM in the EPA


Sub-sector


EPA commitments
(Number of EU Member States)


Full Partial Unbound


Sub-sector modes Sub-sector modes Sub-sector modes


1 2 3 4a 4b 1 2 3 4a 4b 1 2 2 4a 4b


Hotels and restaurants 3 27 25 26 0 0 0 2 1 0 24 0 0 0 27


Catering 27 27 25 26 0 0 0 2 1 0 0 0 0 0 27


Travel agencies 25 27 25 26 14 0 0 2 1 12 2 0 0 0 1


Tour operators services
(Including tour managers)


25 27 25 26 14 0 0 2 1 12 2 0 0 0 1*


Tourist guides services 17 27 27 15 1 0 0 0 12 (=0) 21 10 0 0 0 5


Spa services 0 27 27 0 0 0 0 0 27 (=0) 0 27 0 0 0 27


Source: Annex IV.A, IV.B, IV.C and IV.D of the CARIFORUM-EU EPA.
Explanatory Notes: 4a – Key Personnel and Graduate Trainees; 4b – Contract Service Suppliers (CSS); (=0) – Partial access negated by
nationality requirement; * Ireland is unbound except for tour managers.




CHAPTER I – BUSINESS ADVOCACy WINS MARKETS IN BARBADOS20


market while 21 Member States made entry subject to an
economic needs test.


Particularly useful were the significant gains made for entry
of travel agency and tour operator contractual service
suppliers. These gains should not be underestimated
because market access provides CARIFORUM service
suppliers the opportunity to compete with vertically
integrated suppliers in the European market.


On the question of enhanced Mode 4 access, especially as
it relates to professionals in the culinary, food and beverage
sub-sector, the EU significantly satisfied these demands.
As to enhanced temporary entry privileges for hospitality
students, such students are unlikely to meet the criteria
for graduate trainees. Nevertheless, an effort was made to
address CARIFORUM’s request by including development
assistance for tourism exchange programmes and training.27
This represents a novel approach to permit some form of
mobility for this category of persons.


mutual recoGnition


Regarding negotiation of a MRA for tourism service providers,
under the EPA: ‘The Parties shall cooperate towards the
mutual recognition of requirements, qualifications, licences
or other regulations in accordance with Article 85…’28 Article
85, which deals with mutual recognition more generally,
reaffirms the Parties’ right to require that natural persons
possess the necessary qualifications and/or professional
experience to supply covered services and commits the
Parties to encourage the relevant professional bodies in
their respective territories to jointly develop and provide
recommendations on mutual recognition. Tourism is
identified as one of the priority sectors for the development
of mutual recognition arrangements under the EPA.29


The EPA specifically mandates the EU and CARIFORUM
to encourage their relevant professional bodies to start
negotiations three years after the EPA’s entry into force to
jointly develop and provide recommendations on mutual
recognition.


The CHTA’s desire for improved Mode 1 access through a
review of national legislation implementing the EU Package
Travel Directive30 is, to some extent, addressed in Article 116
of the EPA. It stipulates that the Parties are to encourage
compliance with environmental and quality standards
applicable to tourism services in a reasonable and objective
manner, without constituting unnecessary barriers to trade.


An additional avenue for addressing issues such as
those arising out of the EU Package Travel Directive is the
consultative mechanism for regular dialogue on tourism-
related issues to be established under Article 118 of the
EPA. The exact modalities for the exchange of information
and consultation between the Parties and other relevant
stakeholders have not been spelled out in the EPA, but
are to be developed by the CARIFORUM-EU Trade and
Development Committee.


An adequate assessment of the market access gains from
the EPA requires some discussion of the EPA’s novel tourism-
specific competition disciplines and the provisions on trade-
related capacity building. Both strengthen CARIFORUM’s
supply-side capacity and increase the region’s chances of
exploiting new and enhanced market access opportunities
flowing from the EPA.


comPetition Policy diSciPlineS


Initially, CARIFORUM had proposed to include a tourism
annex in the EPA. The origin of this idea seems to have been
the proposal to the WTO Doha Round of trade negotiations
submitted by Latin American countries in 2001.31 This
proposal was the inspiration for the draft text on tourism
formulated by the CHTA and adopted by the CRNM in the
EPA negotiations. However, the EU resisted including the
annex precipitating a deadlock in the services negotiations.
The EU then presented its own draft text and the parties
were subsequently reached a compromise.


One important element of the WTO Doha Round proposal
that the CHTA and Tourism Association included in its
EPA draft was the creation of a competitive safeguard for
tourism.32 The inclusion of disciplines on anti-competitive
practices was important to CARIFORUM Member States
because the global tourism industry is characterized by
vertically integrated market structures and consolidated
distribution channels controlled by a limited number of large
international players, many based in the EU.33


Article 111 of the EPA requires the parties to maintain or
introduce measures to prevent suppliers from materially
affecting ‘the terms of participation in the relevant market
for tourism services by engaging in or continuing anti-
competitive practices, including, inter alia, abuse of
dominant position through imposition of unfair prices,
exclusivity clauses, refusal to deal, tied sales, quantity
restrictions or vertical integration’.


The EPA provision on the prevention of anti-competitive
practices is legally binding.34 This is also the case for
the provisions on mutual recognition and development
cooperation. Perhaps the EU’s acceptance of these
stronger provisions was linked to its objective to include
a most favoured nation (MFN) clause, which extends
any preference granted by CARIFORUM Member States
to a major trading country to the EU35 as well as to the
EU’s desire to have sector specific disciplines on service
industries, such as e-commerce, telecommunications,
courier, maritime transport and financial services. Within the
meaning of the EPA MFN clause, a major trading economy
is every developed country or any country accounting for a
share of world merchandise exports above 1% or any group
of countries accounting collectively for 1.5% during the year
before, according more favourable treatment to the third
party.




CHAPTER I – BUSINESS ADVOCACy WINS MARKETS IN BARBADOS 21


trade-related caPacity buildinG


The EPA’s treatment of tourism services is also notable for its
development cooperation provisions. The EPA contains an
explicit commitment by the EU to help advance the tourism
sector in the CARIFORUM Member States and sets out a
non-exhaustive list of specific areas in which the parties
agree to cooperate. These areas includes capacity building
for environmental management, developing Internet-based
marketing strategies for small and medium-sized tourism
enterprises, as well as upgrading national accounts systems
to introduce tourism satellite accounts at the regional and
local level.36


concluSion


The EPA negotiations represented an opportunity for service
suppliers in Barbados and the Caribbean to reap benefits
not achieved in the WTO, including:


ƒ Creating meaningful, innovative, market-opening rules
for the sector;


ƒ Establishing a common understanding on issues facing
the sector, such as in the areas of standards and anti-
competitive practices;


ƒ Creating mechanisms to make it easier for EU investors
to choose the Caribbean;


ƒ Strengthening the capacity of CARIFORUM operators
to increase tourism exports and the industry’s
competitiveness.


The EPA’s treatment of tourism services is notable also
for its development cooperation provisions in areas such
as capacity building for environmental management,
developing Internet-based marketing strategies for small-
and medium-sized tourism enterprises, as well as upgrading
national accounts systems to introduce tourism satellite
accounts at the regional and local level.


The EPA’s tourism provisions built upon and incorporated
elements of proposals on tourism made in the Doha Round
of trade negotiations, including those sponsored by the
Dominican Republic and other WTO Members in 2000 and
2001. This illustrates the iterative nature of the relationship
between multilateral and regional trade initiatives


The region’s positions on international trade in tourism
services coalesced through preparatory consultations
across CARIFORUM Member States and through direct
input from the region’s tourism and hotel associations and
other key stakeholders. CARIFORUM countries successfully
advanced their position in the negotiations, leading to
adopting groundbreaking provisions on tourism in the EPA
and creating a common understanding on tourism-related
disciplines among almost a third of the WTO membership.


The success of the Barbados tourism stakeholders’
campaign to secure meaningful new market access
opportunities in the EU market can be attributed to the
engagement of the private sector in the negotiations
process to secure its stated market access aims.


Here, well-organized business associations articulated their
collective interests; the Barbadian Government endorsed
greater public-private collaboration and was open to the
views of the private sector; and negotiators were skilled in
pursuing the interests of private operators.


This latter point should not be underestimated. The
competence of the region’s negotiators was a major element
in the securing of these advances. The CRNM proved to be
an adept intermediary between the region’s private sector
and the EU negotiators.37


The CRNM has proven to be a unifying thread in the
tapestry of the Barbados tourism success story. It has
participated in regional-national collaboration at the
industry level by partnering with the CHTA and Caribbean
Tourism Organization to sensitize national business support
organizations. In this regard, the CRNM provided the
analytical and conceptual framework within which the other
actors identified their interests, assessed their options and
formulated their positions.


Major tasks ahead for private operators in Barbados are
to ensure that all stakeholders recognize the new and
enhanced market access opportunities flowing from the
EPA and strategically position themselves to tap into newly
opened EU markets. Two parallel initiatives, one by the
private sector and another from the Government, suggest
that such a process is underway.


On the private sector side, the CHTA is preparing a guide
for tourism industry stakeholders explaining in user-friendly
terms how they can benefit from the EPA and from the
liberalization commitments undertaken by CARIFORUM
governments. The CHTA is also seeking funding to
finance a road show to promote the market access gains
realized under the EPA and the opportunities for targeted
development assistance and technical support.


The Government is moving forward with plans to establish
an EPA Implementation Unit that will support all industries in
benefiting from the development assistance provided under
the EPA.


This case study illustrates that the private sector in
developing countries, including in small and vulnerable
economies, can reap significant rewards from adopting a
proactive approach to – and early engagement in – trade
negotiations. Benefits can be derived from influencing the
nature and substantive content of agreed provisions and the
level of commitments undertaken by negotiating partners.




CHAPTER I – BUSINESS ADVOCACy WINS MARKETS IN BARBADOS22


endnoteS


1. CARIFORUM refers to the 14 Member States of CARICOM (Antigua and
Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti,
Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines,
Suriname and Trinidad and Tobago) plus the Dominican Republic.


2. A. Dunlop, Tourism Services Negotiations Issues: Implications for
CARIFORUM Countries, (Caribbean Regional Negotiating Machinery, Office
of Trade Negotiations, Caribbean Community (CARICOM) Secretariat,
2003). Available at: http://www.crnm.org.


3. Trade Policy Review: Barbados (Report of the Secretariat, World Trade
Organization, WT/TPR/S/203, p. 8, 2008).


4. Barbados Economic and Social Report 2007 (Ministry of Finance,
Economic Affairs and Energy, pp. 59-60, July 2008).


5. Ibid, p. 60.


6. Barbados Economic and Social Report 2007, (Ministry of Finance,
Economic Affairs and Energy, p. 20, 2007).


7. Ibid, p. 59.


8. Statistical Service Labour Force Survey (Barbados Statistical Service,
2006 and 2007).


9. Barbados Economic and Social Report 2007 (Ministry of Finance,
Economic Affairs and Energy, p. 60).


10. http://www.tradeteam.bb/cms/default.asp?V_DOC_ID=1056.


11. According to the Caribbean Hotel and Tourism Association’s website,
the organization represents the entire spectrum of the hospitality industry’s
private sector including 36 national hotel associations across the
Caribbean region, over 850 hotel members and more than 600 supplier
companies. See: http://www.caribbeanhotelandtourism.com/index.php.


12. What does the EPA have to do with Tourism? (Barbados Private Sector
Trade Team (PSTT), Information Paper 1, April 2006). Available at: http://
www.tradeteam.bb/cms/pstt/files/sector/tourism/What%20does%20an%20
EPA%20have%20to%20do%20with%20Tourism.pdf.


13. Need for Tourism Lobbying (PSTT). Available at: http://www.tradeteam.
bb/cms/pstt/files/tradenews/Need%20for%20Tourism%20Lobbying.pdf.


14. It is unclear what the PSTT considers to be attraction services. In the
document, Submission on the Liberalization of Attraction and Recreation
Services, reference is made to a range of sectors and services. These
include recreational, cultural and sporting services, entertainment services
as well as chartering day/party/pleasure cruises and spa/medical/health
services.


15. Perhaps the EU considered that the general services provisions in
addition to the competition policy framework in Title I, Chapter 1 would
suffice to address the concerns of the CARIFORUM states. See Caribbean
Hotel and Tourism Association, ‘CHA Reacts to Recent Developments
in EPA Negotiations,’ Press Release, 28 September 2007. Available
at http://caribbeanhotelandtourism.com/downloads/Press_092807_
EPAnegotiations.pdf; CHA let down by EU, Nation News, 2 October 2007;
Jessop, D., ‘Grasping the full economic impact of Caribbean tourism,’
Jamaica Gleaner, 23 September 2007.


16. Services included are (CPC 641) hotel and other lodging services;
(CPC 642) food serving services; and (CPC 643) beverage serving
services for consumption on the premises. As a result, Mode 3 for this
sector would include establishing a hotel, motel, holiday camp, restaurant,
catering business, bar, café, etc., in any EU Member State. Mode 4
covers temporary entry visas for staff members of companies that have
established a commercial presence. This could include transferring key
personnel (e.g., managers) or graduate trainees to work in the business
for up to three years, or sending senior staff responsible for setting up the
business for up to 90 days. For more information on CPC 641-643, see
http://unstats.un.org/unsd/cr/registry/regcs.asp?Cl=9&Lg=1&Co=64.
PSTT requested that the Czech Republic and Poland remove limitations
for beverage serving services (CPC 643). These limitations have been
removed as indicated in table 2. PSTT requested Italy to remove its
requirement for an economic needs test for new bars, cafes and
restaurants. However, this request was rejected, as indicated in table 2.
PSTT requested all EU Member States to remove limitations for movement
of staff. This request was not entirely accepted as Bulgaria retains some
requirements regarding foreign managers not outnumbering Bulgarian
managers for certain types of companies. (Mode 4a.) As far as limitations
on contractual service suppliers in the hotel sector, none of the EU
Member State has agreed to the request.


17. For this services, Mode 1 includes supplying travel information and
booking services online or by telephone; Mode 3 includes establishing
a branch office/agency in an EU Member State; and Mode 4 includes
transferring company staff to establish and run a branch office in an EU
Member State. PSTT requested that all limitations for Modes 1, 3 & 4 be
removed.
This was not entirely agreed, as indicated in table 2:
Mode 1 – All EU Member States, except Bulgaria and Hungary, removed
limitations.
Mode 3 – Bulgaria and Portugal retain some requirements about
companies needing to incorporate in the country. All other EU members
removed limitations to setting up a branch office.
Mode 4 – Bulgaria retains a requirement regarding foreign managers not
outnumbering Bulgarian managers (and some of general reservations
across all sectors may apply).


18. PSTT requested all limitations be removed. However, some EU
Member States retained a ‘nationality condition’ as indicated in table 2.


19. According to the Caribbean Hotel and Tourism Association: ‘National
provisions implementing the EU Package Travel Directive have resulted
in the application of standards which are inappropriate for the Caribbean
climate and the location, design and architecture of Caribbean hotels.
For example, some CARIFORUM properties have to introduce elaborate
evacuation systems more suited to high-rise buildings when they have
only two or three floors. The large cost of compliance has been a major
issue for CARIFORUM hoteliers.’ ‘The Position of the Caribbean Hotel
Association (CHA) on the Treatment of Tourism within the Economic
Partnership Agreement with Europe’, Caribbean Hotel and Tourism
Association, April 2005.


20. Eventually, this proved to be the case for the most part with respect to
the Mode I supply of hotel services as only three EU Member States took
full commitments.


21. Because the scope of this case study is limited to tourism services,
it does not cover other market access gains of interest to the tourism
stakeholders in entertainment services; business services; and
recreational, cultural and sporting services.


22. This discussion of market access gains benefits from the Caribbean
Regional Negotiating Machinery’s Brief, ‘Treatment of Tourism in the
EPA’, 3200.3/EPA-09[08], Kingston/Christ Church, Caribbean Regional
Negotiating Machinery, 2008.


23. Airline catering services are a likely exception to this observation.
However, these services are classified as services auxiliary to air transport
and not included in the tourism services sector.


24. The Barbados stakeholders’ requests were for the most part
incorporated into the regional market access requests. While the
discussion is framed mostly in terms of gains achieved by the Barbados
tourism stakeholders, this is a somewhat artificial approach as the EU
responded to a consolidated CARIFORUM market access request and not
to the requests of the Barbados tourism services suppliers.


25. The market access granted by the EU is still significant even with
10 Member States remaining unbound. Tourism receipts for these 10
countries (Bulgaria, Cyprus, Czech Republic, Hungary, Italy, Latvia, Malta,
Poland, Slovakia and Slovenia) in 2006 represented only 21.89% of the EU-
27’s total. The remaining 17 countries, which have removed market access
restrictions, account for almost 80% of the total receipts. See European
Commission, Eurostat Pocketbooks: Tourism Statistics, p. 33, European
Commission 2008.


26. The aircraft catering services sub-sector is important because a
Barbadian firm has developed expertise in this area and has expanded
operations in Central and South America and other parts of the Caribbean.


27. CARIFORUM-EU EPA, Article 117 (2)(e) provides for tourism exchange
programmes and training, including language training for tourism services
providers.


28. CARIFORUM-EU EPA, Article 114.


29. CARIFORUM-EU EPA, Article 85 (3).






CHAPTER I – BUSINESS ADVOCACy WINS MARKETS IN BARBADOS 23


30. The EU’s Directive 90/314/EEC on Package Travel, Package Holidays
and Package Tours, ‘is designed to protect consumers who contract
package travel in the EU. It covers the sale of a pre-arranged combination:
Consumers are covered where, at least, two of these elements are sold
or offered for sale at an inclusive price and the service covers a period
of more than twenty-four hours or includes over-night accommodation’.
The Directive contains, inter alia, rules concerning the liability of
package organisers and retailers, who must accept responsibility for the
performance of the services offered. The EU Package Travel Directive is
available at: http://ec.europa.eu/consumers/cons_int/safe_shop/pack_trav/
index_en.htm.


31. ‘Communication by Bolivia, Dominican Republic, Ecuador, El Salvador,
Honduras, Nicaragua, Panama, Peru and Venezuela: Draft Annex on
Tourism’, S/CSS/W/107, World Trade Organization, 26 September 2001.


32. The EU’s reaction to Dominican Republic’s Doha Development
Agenda proposal was to support the main intentions of the proposal,
while not explicitly endorsing the Tourism Annex to the GATS. However,
the EU signaled that two issues in the draft – tourism and sustainable
development and competitive safeguards – merited further consideration.
See: Dunlop, A., Tourism Services Negotiations Issues: Implications
for CARIFORUM Countries, Caribbean Council, Caribbean Regional
Negotiating Machinery, Office of Trade Negotiations, Caribbean
Community (CARICOM) Secretariat, 2003. Available at: http://www.crnm.
org.


33. ‘The Treatment of Tourism in the CARIFORUM-EU Economic
Partnership Agreement’, p. 2, Caribbean Regional Negotiating Machinery.


34. By contrast, the other provisions in the Section 7, which addresses
the tourism sector, are non-binding. Sauvé and Ward explained this
combination of binding and non-binding provisions as being reflective
of the dynamics of negotiations. By most accounts, most of the tourism
provisions, which were formulated with the active participation of the
CARIFORUM members’ private sector, were resisted by the EU. Hence,
it seems that the priority for CARIFORUM states was to ensure that the
key provisions relating to anti-competitive behaviour, mutual recognition
and development co-operation were made legally binding. See Pierre
Sauvé and Natasha Ward, ‘The CARIFORUM-EC Partnership Agreement:
Assessing the Outcome on Services and Investment.’ ECIPE Discussion
Paper. Brussels: European Centre for International Political Economy.
Forthcoming.


35. CARIFORUM-EU EPA, Article 70: 1 (b) and 79: 1 (b).


36. A Tourism Satellite Account (TSA) is a statistical instrument to
analyse the economic importance of tourism. According to the European
Commission: ‘A complete TSA contains detailed production accounts of
the tourism industry and their linkages to other industries, employment,
capital formation and additional non-monetary information on tourism’.
More information: http://statistics.unwto.org/en and http://ec.europa.
eu/enterprise/sectors/tourism/cooperation/tourism-satellite-account/
index_en.htm.


37. CARIFORUM’s capacity to negotiate a comprehensive EPA was
enhanced by the region’s already acquired experience in negotiating
trade issues in several fora. The negotiation of the CARICOM-Dominican
Republic Free Trade Agreement provided insights on existing barriers to
trade in the CARIFORUM region and clear indications of what the future
liberalization agenda should look like within the sub-region. Negotiations
on the ill-fated Free Trade Area of the Americas exposed CARIFORUM
negotiators to a wider range of trade issues. These processes, together
with experience gained in multilateral negotiations at the WTO, contributed
to improving the region’s negotiating skills and boosted the region’s
comfort level in dealing with many of the policy areas, old and new, that
became subject to EPA negotiations. For a more in depth discussion, see:
P. Sauvé, N. Ward, The CARIFORUM-EC Partnership Agreement: Assessing
the Outcome on Services and Investment, European Centre for International
Political Economy, January 2009. Available at: http://www.ecipe.org/.




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chaPter ii


boosting export
competitiveness in ghana
a successful public-private partnership for
integrated customs services


case study executive summary �������������������������������������������������������������������������������������������������������������������� 26


innovative trade facilitation ������������������������������������������������������������������������������������������������������������������������ 27


overcoming challenges ��������������������������������������������������������������������������������������������������������������������������������� 28


making legal and regulatory changes �������������������������������������������������������������������������������������������������� 29


operating the project ��������������������������������������������������������������������������������������������������������������������������������������� 30


project achievements �������������������������������������������������������������������������������������������������������������������������������������� 32


success factors ������������������������������������������������������������������������������������������������������������������������������������������������ 33


implementation challenges��������������������������������������������������������������������������������������������������������������������������� 36


conclusion ������������������������������������������������������������������������������������������������������������������������������������������������������������ 37




CHAPTER II – BOOSTING ExPORT COMPETITIVENESS IN GHANA26


booStinG exPort
comPetitiveneSS in Ghana
a SucceSSful Public-Private PartnerShiP for
inteGrated cuStomS ServiceS


caSe Study executive
Summary


Public-private partnerships (PPPs) offer mechanisms
enabling private sector groups and business associations to
play a greater advocacy role in formulating and implementing
policy. PPPs can also deliver infrastructure and services
projects in a more economically efficient and sustainable
manner.


This case study showcases Ghana’s success in
implementing a PPP – the Ghana Community Network
Services Limited (GCNet) – to integrate and improve
customs operations. The GCNet project highlights the
importance of private sector participation in creating an
enabling business environment for economic growth. The
strategic partnership of a multinational company – Société
générale de surveillance (SGS) – was a major contributing
factor to the project’s success.


SGS is a global company with substantial financial
resources to finance the project. Through its trade
inspection and verification services, SGS was seen as
having adequate experience in trade facilitation and
revenue enhancement programmes. SGS’ TradeNet is an
Integrated Trade Community Network, which was initially
developed in Singapore in the 1990s. Since its inception,
the system has continuously evolved and TradeNet
Singapore today handles more than 20 million files per
year and has become a model around the world.


Software applications for government use rarely succeed
if they are implemented as one-time events without
continuous operational support and infrastructure
management. The TradeNet concept is based on the
understanding that the software is a tool that needs robust
continuous support to deliver its full potential. The software
evolves with time and users must be appropriately trained
to use it. TradeNet is a flexible, modular system that is
highly customized to suit the needs of a particular country
taking into consideration existing assets and local trade
particularities.


Through the PPP, a team comprised of representatives from
the public and private sectors established a joint venture
company to manage the project, reviewed and streamlined
the procedures, trained 1,500 people, and implemented the
necessary infrastructure.


The TradeNet system reduces clearance time, increases
customs revenues, reduces errors due to multiple data
entry, increases transparency, and boosts consistency
in processes. In Ghana, the GCNet project achieved
stakeholder goals, which included:


ƒ Simplifying customs procedures;
ƒ Clearing goods faster;
ƒ Facilitating quicker transit with a satellite tracking system;
ƒ Increasing revenue collection;
ƒ Improving the competitiveness of Ghanaian exports.


The competitiveness of Ghana’s exports was significantly
improved, particularly for small and medium-sized firms,
due to the expeditious processing of export consignments
as well as the issuing of electronic permits and certificates
of origin and transmitting them to the export destination
authorities. Clearance time immediately decreased from
weeks to hours and government revenue through import
duties increased by 35%. Statistics from 2007 indicated
that TradeNet handles just under a million files per year and
interconnects 800 users across the country.1


The World Bank-International Finance Corporation (IFC)
Doing Business Report 2007-2008, which ranks 178
economies for the regulatory ease of doing business,
recognized Ghana to be one of the most improved countries.
The IFC acknowledged that the GCNet system was one of
the major contributing factors to the improvement. Both
the World Bank and the World Customs Organization have
recognized GCNet as an example to follow in the region.


The PPP drove the successful implementation of the project,
however, a number of other critical factors also contributed
to its success, including:


ƒ Government support and belief in the project;
ƒ Credible partners;




CHAPTER II – BOOSTING ExPORT COMPETITIVENESS IN GHANA 27


ƒ Developing specific project infrastructure;
ƒ Phased-in project implementation;
ƒ Tangible manifestations of success;
ƒ Training, sensitization and capacity building;
ƒ Responding to emerging trends and urgent requirements;
ƒ Sustainable self-financing.


The use of a PPP to achieve export impact makes the case
study replicable in other countries. ITC, in partnership with
GCNet, has produced this case study to share best practices
that led to significantly improved export competitiveness. It
describes Ghana’s experience in initiating the partnership,
including choosing the right partners, critical success
factors, operational aspects, and how the major challenges
were overcome. GCNet has brought the country closer
to achieving Ghanaian President John Kufuor’s vision,
expressed in his inaugural address in January 2001, to
create a ‘Golden Age of Business for Ghana’.


innovative trade
facilitation


PPPs have become a useful medium for implementing
projects or delivering services traditionally provided by
the public sector in a more economically-efficient and
sustainable manner.2


The Ghanaian Government found it expedient to use a
PPP to modernize its customs operations without having to
finance on its own the total cost (US$ 12 million) for physical
infrastructure, communication networks, upgrading
customs facilities, and electric generators placed in remote
border stations.


the Private Sector umbrella body


The Government identified the private sector as an engine
for economic growth. It made efforts to build the capacity
of private sector groups and business associations to play
a greater advocacy role in formulating and implementing
policy. An umbrella body for various private sector business
associations – the Private Enterprise Foundation – was
established. With support from development partners,
government’s policy reforms included:


ƒ Removing restrictive regulations;
ƒ Building private sector capacity through training and


consultancy services;


ƒ Developing product, market, and management
information systems (MIS);


ƒ Investing in infrastructure, for example by developing
artisanal centres.3


The President of Ghana, John Kufuor, in his inaugural
address in January 2001, declared a ‘Golden Age of
Business for Ghana’. This resulted in closer collaboration
between the public and private sectors, including the
creation of a Ministry of Private Sector Development to
promote public-private sector collaboration.


exPort-led Growth throuGh
cuStomS reform


When the Government implemented its Gateway
Programme,4 which sought to attract investments to
accelerate export-led growth and remove constraints to
trade development in Ghana, it decided to reform the
processes and procedures used by the Customs Excise
and Preventive Service (CEPS).


This project aimed to attract export-oriented investors to
Ghana to accelerate export-led growth and facilitate trade.
The project also sought to increase the competitiveness of
Ghanaian products in the global market through the reform
of legislative, regulatory, and incentive systems; institutional
strengthening and capacity building; and development of
private participation in infrastructure. It aimed to reduce and
improve the processing time for customs documentation
and standards, prevent fraud and improve revenue
collection.


The project also aimed to enhance the capacity of customs
and related agencies by equipping them with an electronic
data interchange (EDI) platform that inter-connects both
private and public agencies to avoid duplication, and
reduce costs and time for processing customs and trade
documents.


an electronic community network


The Government of Ghana faced financial constraints and
a lack of technical capacity for maintaining the previous
system. Therefore, a PPP was considered an ideal method
for implementing the new automated system, to foster
stakeholder buy-in, and to ensure its sustainability. As
a result, the Government attempted to bring in as many
credible stakeholders as possible together with a strategic
technical partner.


The Government was motivated to use this arrangement
drawing upon its earlier experiences in executing trade
facilitation and revenue management projects. Previous
experience with such projects showed they suffered from
delays so that by the time the project was implemented the
desired goals were not fully achieved. The projects were
largely driven by technical assistance, but with inadequate
provision for renewal or maintenance of investments to
ensure project sustainability once the technical assistance
was withdrawn.




CHAPTER II – BOOSTING ExPORT COMPETITIVENESS IN GHANA28


The Government was the primary project champion.
However, through earlier public-private sector policy
dialogue, both sectors had identified the need to address
certain constraints affecting business competitiveness.
Thus, the private sector was also clamouring for the project.


GCNet was established in October 2000. As a joint venture
PPP, its aim was to ensure that all stakeholders with a vision
for enhancing Ghanaian competitiveness participated in
this electronic community network for the processing of
trade and customs related transactions.


GCNet mission


ƒ Automation of customs procedures
ƒ Fully integrated EDI service/Tradenet
ƒ Enhance the speed of customs clearance thereby


accelerating speed of port clearance and reducing cost
of business


ƒ Improve transparency in customs procedures/Reduce
discretionary practices


ƒ Domestic revenue mobilization
ƒ Improve trade management and trade information/


statistics to government


GCNet business model


ƒ Ten-year Government of Ghana mandate
ƒ Joint Venture Agreement – GIPC/Companies Code
ƒ Approx US$ 6 million initial equity x 2.5
ƒ Ghana customs’ equity was financed by World Bank
ƒ Mandatory use of system under customs law
ƒ Parliamentary legislation for electronic transactions
ƒ User fee of 0.4% of FOB value
ƒ Two year customization/training/infrastructure
ƒ Technology partners from Singapore and Mauritius
ƒ Build – Own – Operate


Source: Courtesy of GCNet.


Partners brought into the partnership financial resources,
technical know-how, and other strengths. They also became
very supportive project champions that drove the initiative.


overcominG challenGeS


The Government needed to identify a strategic technical
partner that was prepared to invest in the project and drive
the process. This was considered critical because previous
e-governance projects implemented by the Government
had not met start-up goals. Past projects had been
unsustainable due to inadequate budgetary resources for
investment and recurrent expenditure, lack of managerial


core competencies and lack of drive to overcome the
inherent change management challenges.


In earlier e-governance projects needs were identified.
Through the Government’s initiative or through donor
support, technical solutions were identified and deployed.
Unfortunately, due to donor requirements, such as tied
aid or drawn-out project appraisal and implementation
requirements, optimal technical solutions and processes
were not implemented. In the past, relatively little attention
was paid to complementary processes that could have
contributed to project success. For example, effective
change management could have been undertaken by
sensitizing and educating stakeholders.


The projects were often implemented through project
management teams that were not core officials of the
implementing institution, but outsiders recruited for the life
of the projects. As a result, institutional core competencies
and capacities to ensure the sustainability of the projects
were not built. Specialized information and communications
technologies (ICT) skills and managerial expertise required
for such e-governance projects were often lacking within
the public services. In addition, the public sector could not
retain specialists because it could not compete with the
better conditions of service offered by the private sector.


Once the projects were rolled out, there was insufficient
new funding to undertake system upgrades as new
technologies or operating systems evolved. In due course,
the system failed to meet operational requirements and the
e-governance projects failed.


chooSinG the riGht PartnerS


To address these challenges, the Government identified
Société générale de surveillance (SGS), as a potential
partner. SGS is a global company with substantial financial
resources to finance the project.


Through its trade inspection and verification services,
SGS was seen as having adequate experience in trade
facilitation and revenue enhancement programmes. SGS
had a strategic partnership alliance with the foremost
TradeNet operator, then Singapore Network Services.
TradeNet is an Integrated Trade Community Network. The
concept of an Integrated Trade Community Network was
initially developed in Singapore with TradeNet in the 1990s.
Since its inception, the system has continuously evolved
and TradeNet Singapore today handles more than 20 million
files per year and has become a reference around the world.


It is generally recognized that software applications for
government use rarely succeed if they are implemented
as one-time events without continuous operational support
and infrastructure management. The TradeNet concept is




CHAPTER II – BOOSTING ExPORT COMPETITIVENESS IN GHANA 29


based on the understanding that the software is a tool that
needs full continuous support to deliver its full potential.


GCNet public-private partnership


ƒ Ghana Customs 20%
ƒ Ghana Shippers’ Council 10%
ƒ Ghana Commercial Bank 5%
ƒ Total public 35%


ƒ Société générale de surveillance 60%
ƒ Ecobank Ghana Ltd 5%
ƒ Total private 65%


Source: Courtesy of GCNet.


The software evolves with time and users must be
appropriately trained to use it.


The TradeNet system significantly reduces clearance time,
increases customs revenues, reduces errors due to multiple
data entry, increases transparency and enables consistency
in processes. It is not a stand-alone off-the-shelf product
that can be implanted on a ‘plug-and-play’ basis. TradeNet
is a flexible, modular system that is highly customized to suit
the needs of a particular country taking into consideration
existing assets and local trade particularities.


SGS was prepared to invest and commit to driving the
project implementation process through a strategic
partnership arrangement. SGS’ commitment to the project
differed from other proposals that primarily aimed to supply
software and install hardware to run it without ensuring that
the system works efficiently and sustainably.


The Government chose SGS and gave the company a
mandate to identify suitable partners for the PPP, which
would then be considered by the Government. Overtures
were made to all relevant stakeholders that had an interest
in imports and exports through Ghanaian ports in collecting
trade-related revenue. Stakeholders included the Ghana
National Chamber of Commerce and Industry (GNCCI), the
Association of Ghana Industries (AGI), the Ghana Shippers’
Council (GSC), the Ghana Ports and Harbour Authority
(GPHA), the freight forwarders’ associations, inspection
companies, the ship owners’ association, banks and a
telecommunications company.


SellinG the Project


Given the poor track record of previous e-governance
projects and the perceived riskiness of this start-up project,
most of these stakeholders were reluctant to invest, despite
their interest in the project. An AGI executive at the time
commented, ‘We want this project like yesterday. you take
off and we’ll join later.’


This guarded response was further reinforced by the fact
that in 2000, when the project was being promoted, interest
rates were very high at around 40%. Government treasury
bills and bonds offered a more secure return than investing
in a perceived risky e-governance project.


To address these challenges SGS, as a strategic technical
partner, became an active promoter of the project – preparing
the project prospectus, sensitizing all stakeholders and
potential members about the project’s benefits for primary
stakeholders and the economy as a whole. SGS’ successful
experience in Singapore was also showcased.


With the Government’s support, selected stakeholders were
given the opportunity to see, appraise and learn first-hand
about similar experiences elsewhere. For example, they
could study the case of Mauritius where a public-private
partnership model had also been used. Stakeholders
were regularly informed about each development stage
of the system and its implementation. In doing so, they
could measure the progress of the work with each goal or
benchmark that had been set before the project start up.


Through a Project Implementation Team and its sub-groups,
which cut across a broad spectrum of stakeholders, the
interested parties considered themselves as having a
vested interest in the rollout of what became a community
project. With these measures, a convincing outcome
was showcased and the scepticism that plagued similar
e-governance projects was overcome.


makinG leGal and
reGulatory chanGeS


To implement the GCNet project, the legislative framework
underpinning customs clearances needed review. In the
past, almost all the processes were manual. Introducing an
automated system required new legislation that recognized
electronic processing of transactions and payments. In
the light of these requirements, the Ghanaian parliament
passed a new Legislative Instrument (LI).5 To ensure easy
passage through parliament and subsequent compliance
by stakeholders, the LI was drafted by a broad stakeholder
group to ensure their concerns were considered and
addressed.


After its enactment, the LI was periodically refined with
Commissioner’s Orders (operational regulations) that
revised some operational procedures. The Commissioner
of Customs was given these powers under the Customs
Management Law, which governs the administration and
operations of Customs.6


In addition to automation, certain operational and
administrative processes had to be rationalized. Because
automating existing inefficient processes was pointless,
certain existing operational functions were eliminated, such
as Face Vet,7 Numbering8 and Bond Seat.9 Some new




CHAPTER II – BOOSTING ExPORT COMPETITIVENESS IN GHANA30


functions were created to ensure efficient and transparent
operations, such as Compliance Officer10 and Help Desk
Officer.11


A culture of change management was promoted through a
number of measures, including:


ƒ Acquiring new skills;
ƒ Improving the work environment with refurbished offices;
ƒ Promoting and rewarding efficient work.


The photos below show a CEPS office before and after the
GCNet project was implemented.


In addition to providing CEPS officers with new tools and
systems, their work environment was improved to enable
them to experience and understand the changes, thereby
promoting a new work ethic. Officers were encouraged to
provide quality service, while beneficiaries of the new service,
such as trade operators, experienced and benefitted from
the change.


addreSSinG technical aSPectS


The technical aspect of the project entailed introducing
TradeNet, an EDI platform with Extensible Mark Up Language
and functionalities for transmitting electronic messages
and replies between trade operators, customs, regulatory
bodies involved in the clearance process for goods through
the ports, and others who use the data generated.


A versatile automated system for processing all customs
declarations and payments was developed and deployed.
This system enabled all customs operational functions to
be carried out more efficiently and effectively, including
manifest transmission and integration, importer and exporter
declarations, warehousing, free zone, valuation and transit
tracking.


Electronic issuance of certificates, permits, licences and
exemptions required for customs clearances by regulatory
agencies – for example the Standards Board, Environmental
Protection Agency, Investment Promotion Centre, etc. –
play an important role in importing and exporting goods.
TradeNet serves as a Single Window through which all
trade and customs electronic procedures are processed.
Similarly, relevant agencies such as the finance and trade
ministries, statistical service and central bank are connected
to the system for access to data they require to prepare
their statutory reports on issues such as foreign trade and
revenue reconciliation. Data is also used in areas such as
development planning.


An e-services portal was introduced so that users could
check on the status of their various declarations, access
the car valuation database and run web-based reports. The
portal also enables transit operators to track consignments
along the transit corridor.


oPeratinG the Project


The project operates primarily through GCNet, the PPP joint
venture company, which is responsible for developing and


Box 4: Before and after GCNet – clients see the difference


Before GCNet: Insufficient automation brought customs
delays.


Source: GCNet.


After GCNet: The new system has led to a better work
environment and faster processing times for exporters.




CHAPTER II – BOOSTING ExPORT COMPETITIVENESS IN GHANA 31


deploying all systems, including hardware and software.
While it operates the e-messaging platform that serves
as the front-end system for all non-customs users, Ghana
CEPS is responsible for the operation of the back-end
application, the Customs Management System (CMS).


The front-end system is part of the software that is a thick
client application, which provides users with more features,
graphics and choices, thereby making the applications
more customizable. The thick client application is used by
importers, exporters, freight forwarders, carriers, ministries,
departments and agencies to enable them to communicate
and undertake relevant processes electronically. The back-
end application is the CMS application that processes the
output from the front-end system, for example by validation
or verification as this process queries the CMS database.


A board of directors, comprised mainly of representatives of
the PPP partners and a government representative, ensures
that the project meets its service mandate. Externally, the
PPP’s operations and performance are regulated and
reviewed by the Ministry of Trade & Industry through a
Review Committee. The PPP collaborates with various
regulatory agencies, including the Ministry of Finance and
Economic Planning, the Revenue Agencies Governing
Board, the Ministry of Ports and Railways and the Ministry of
Communications.


manaGinG chanGe


The GCNet system led to a radical change in the way
Ghana CEPS operates. The automation process eliminated
the manual mode of operations and the need to rationalize
certain operations, while generating a number of changes.


Certain operational functions were eliminated and new ones
introduced.


The new system was deployed in complex and intensely
political agencies. Some users resisted the change, seeing
it as a threat to their existence, perceived benefits and
entrenched operational modes. To overcome this resistance,
project champions with influence to act as change agents
were identified to manage the change process and to
assuage anxieties.


For example, a message was disseminated assuring CEPS
officers that automation did not necessarily mean a loss
of jobs if they were willing to be retrained. In fact, the new
system generated a lot of data that needed to be analysed
for management reporting purposes. The system did not
lead to redundancies as was feared, but entailed some
changes in job content for the Customs Officers.


An organizational systems review was implemented.
Introducing corporate planning capacity in customs and an
ISO certification programme ensured that some systems
skills were improved on a regular basis. The review included
compensation, appraisal, promotion, reward and incentive
systems to ensure effective change management.


Efforts were made to build commitment, buy-in and
ownership of the change agents. They were encouraged
to learn to use the system, appreciate its capacity to drive
the change process, and understand how the system
contributes to CEPS goals, such as revenue targets. For
example, if the clearance station commander, an older
person with no prior ICT skills, could learn the system, his
younger colleagues were obliged to learn to use it also.
This not only improved knowledge and use of the system,
but also enabled senior officers to establish authority and


Figure 3: Before and after – Streamlined processes save time


Port operators


Free zone Customs


Controlling agency


Airport


Quarantine


Warehouse


Traders


Banks


Shipping agency


Forwarding agency


EDI
Internet


DIS
Customs


MOF


GPHA


Freight station


MOTI


Traders


Freight Forwarder


Shipping lines


Banks


AFGO


The previous situation in Ghana The situation now


It could take a week to clear a consignment. Paper-based administrative
work led to duplication, errors, higher costs and lost time.


The new system brings common access through an online platform and
has saved time and money.


Source: GCNet.


Note the following acronyms: Ministry of Trade & Industry (MOTI), Ghana Ports & Harbours Authority (GPHA), Ministry of Finance (MOF) and
Destination Inspection Services (DIS).




CHAPTER II – BOOSTING ExPORT COMPETITIVENESS IN GHANA32


show subordinate officers successful deliverables and how
the new system helps to enhance customs operations.
Leadership by example was displayed and ownership was
established.


Chief agents were encouraged to exercise their authority,
reward good performance and impose sanctions for bad
performance. GCNet supported a customs annual award
scheme for the best officers, provided logistical support
to high performing stations and also provided a monthly
stipend to key officers who use the system effectively.


Project achievementS


The GCNet project achieved stakeholder goals, which
included:


ƒ Simplifying customs procedures;
ƒ Clearing goods faster;
ƒ Facilitating quicker transit with a satellite tracking system;
ƒ Increasing revenue collection;
ƒ Improving the competitiveness of Ghanaian exports.


SimPlifyinG cuStomS ProcedureS


There was significant improvement in clearances of goods
through customs.


ƒ The former requirement for clients to shuttle to and from
one agency to another to procure permits, licences, or
exemptions needed for the clearance process has been
largely eliminated.


ƒ The tedious process of physically submitting cargo
manifests to customs and other relevant agencies was
eliminated as manifests are now submitted in advance
electronically.


ƒ Thirteen manual processes within the customs Long
Room that used to take approximately two to three days
have been eliminated.


clearinG GoodS faSter


Clearing goods at the main port of Tema, which used to
take on average two weeks, now takes an average of two to
three days. Clearances through the second port of Takoradi
are almost done in one day. Clearances through the airport
are averaging two to four hours, unlike the two-to-three day
average before the project. At land borders, consignments
are processed in a matter of hours rather than a whole day
or longer.


These clearance times have been possible because of
the risk selectivity features of the system and the selective
targeting of consignments. The system’s risk selectivity
features are varied, and configured by a range of parameters


determined by a high-level Risk Management Committee.
Among the parameters used are intelligence from other
customs administrations or security agencies and risk
profiles of importers, exporters, agents, vessels, country
of shipment, etc., based upon previous transactions or tax
records.


facilitatinG tranSit with a Satellite
trackinG SyStem


With the introduction of satellite tracking, transit
consignments are exiting the country quicker than when
escorts were used.


Transit Vehicle


Position obtained from 4 fixed satellites


Earth Station - UK


Inmarsat communiations satellite


GCNet Tracking PortalTracking server


Transit vehicule


Internet


Source: GCNet.


increaSinG revenue collection


There has been a surge in revenue collection by customs
since the project was implemented. From 2003 when the
GCNet project started through 2008, there has been an
average annual growth in revenues collected by customs
of 33% for the port at Tema and 32% for the Kotoka Airport.
Total revenues collected by customs grew by nearly 170%
from 2003-2008 (see figure 4).


This significant growth in revenue is not a coincidence.
The new system’s control features ensure that while trade
is facilitated, revenue collection is not compromised. For
example, the disparate verifications of customs entries
that used to give rise to inconsistencies in classifying and
valuating consignments from one customs clearance
station to the other have been eliminated.


Under the old, inefficient system, consignments could
be smuggled out of the ports and cargo lists could be
manipulated and not properly accounted for. These
problems have been significantly eliminated by the new
system, which ensures that carriers arriving at the ports
provide customs with a detailed manifest of consignments
prior to or upon arrival.


Other problems included the ineffective control of transit
consignments, which led to their diversion onto the
domestic market without payment of duties and taxes. The




CHAPTER II – BOOSTING ExPORT COMPETITIVENESS IN GHANA 33


new system has curtailed many of these problems. Similarly,
the ineffective control and abuse of warehousing and free
zone privileges granted to some trade operators have
largely been addressed. In addition, by capturing export
declarations electronically, it is possible to better track
exports to ensure the proper export receipts are declared
and, where necessary, recovered.


imProvinG exPort comPetitiveneSS


Competitiveness of Ghanaian exports has increased due
to the expeditious processing of export consignments as
well as the electronic issuance of permits and certificates of
origin and their transmission to the authorities of the export
destination. In the World Bank-IFC Doing Business Report
2007-2008, which ranks 178 economies for the regulatory
ease of doing business, the IFC recognized Ghana to be
one of the most improved countries for doing business. The
IFC acknowledged that the GCNet system had been one of
the major contributing factors to the improvement.


In 2005, Ghana ranked 108 in the World Bank-IFC Doing
Business report’s category of Trading Across Borders,
with an index of 6 against a regional index of 8.5 and an
Organisation for Economic Co-operation and Development
index of 5.3 for export documentation. The report noted,
‘In Ghana, new technology links with several commercial
banks so that customs officers can confirm the payment
of duties without the need for additional paperwork.’12 By
2007, Ghana’s ranking had improved to 61, and among the
notable factors that contributed to this were applying risk
management techniques and introducing EDI systems.13


In 2006-2007, Ghana received an award for being the top
African reformer. It ranked as a global top 10 reformer
for the second year running. It was noted, ‘Changes in
operations sped up imports, while new civil procedure rules
and mandatory arbitration and mediation reduced the time
needed to enforce contracts.’14


SucceSS factorS


The PPP drove the successful implementation of the project,
however, a number of other critical factors also contributed
to its success, including:


ƒ Government support and belief in the project;


ƒ Credible partners;


ƒ Developing specific project infrastructure;


ƒ Phased-in project implementation;


ƒ Tangible manifestations of success;


ƒ Training, sensitization and capacity building;


ƒ Responding to emerging trends and urgent requirements;


ƒ Sustainable self-financing.


Government SuPPort


The Government supported the project because it
believed GCNet would contribute to realizing its Gateway
Programme objectives of promoting trade, investment
and competitiveness. This conviction was reinforced by
the surge in government revenues after the project was
launched.


The recognition of the PPP’s contribution to the business
environment in Ghana by international organizations such
as the World Bank and the IFC reinforced the Government’s
support of the project.15


Over time, the Government has come to appreciate the
potential of ICT to accelerate economic development and
has sought to promote ICT initiatives. This is another reason
why the GCNet is a win-win initiative for the Government and
why it provided the support critical to the project’s success.


Figure 4: Revenue grows at Kotoka International Airport, 2002-April 2008


Jan. Feb. Mar. Apr. May June July Aug. Sep. Oct. Nov. Dec.


1 200


1 000


800


600


400


200


0


Mo Ghanaian cedi
2002 2003 2004 2005 2006 2007 2008


Source GCNet.




CHAPTER II – BOOSTING ExPORT COMPETITIVENESS IN GHANA34


credible PartnerS


The strong public-private partnership of GCNet is due to the
credible stakeholders that brought their core competencies
to the partnership. The PPP harnessed the respective
strengths of each partner. Individual strengths of the project
champions were also critical to GCNet’s success. For
example, because integrity and ethics is at the core of the
corporate governance philosophy of two of the partners, the
PPP was obliged to adopt this philosophy.


The PPP was able to raise finance for its operations
because two of the partners were banks. This gave the
PPP the ability to raise additional financing when the need
arose. As regards technical operations, the partnership
could draw upon the technical know-how and experience
of the partners in several areas, including performance
of equipment, after-sales service support by vendors and
disaster recovery plans.


Project–SPecific infraStructure


Another critical success factor was GCNet’s willingness to
invest in its own infrastructure to overcome the lack of existing
infrastructure. Electricity supply and telecommunication
services – particularly Internet services – were inadequate,
limited to certain regions of the country, and unreliable where
available. GCNet was compelled to implement its own
infrastructure to ensure it was able to fulfil its commitment to
operate on a 24-hour/7-day basis.


Aflao


Kumasi


Takoradi


Kotoka Airport


Tema


GCMS Primary Network


Hamile


James Town


CEPS HQ


Kulungugu


Bolga
Tamale


Trading
Community


Elubo


CEPS HQ Network


GCNet


Radio Tower


Paga


GCNet: A national network


Source: GCNet.


GCNet installed generators and uninterruptible power supply
hardware to complement the available supply of electricity.
Fuel storage tanks with personnel to refuel them regularly
were deployed. This ensured a regular electricity supply
assured systems’ uptime. Where service by the foremost
service provider with the widest network was unavailable –


Box 5: GCNet – geographic coverage


Phased project coverage:


ƒ 2001-2002: Development phase
ƒ 2003-2007: Rollout phase


The Ghana Customs Management System
(GCMS) was rolled out to the following CEPS
stations, which collect more than 95% of CEPS
revenue:


– Kotoka International Airport, January 2003
– Port of Tema, June 2003
– James Town, August 2003
– Takoradi, November 2003
– Aflao, September 2004
– Elubo, August 2005
– Paga, March 2006
– Kulungugu, March 2007
– Hamile, June 2007


Ghana Telecommunications (GT) – GCNet either financed
GT to extend its network or built the facilities itself.


a PhaSed aPProach


Another success factor was the phased approach adopted
by the PPP. From an initial station at the Kotoka International
Airport that was a microcosm of the entire operation, the
project was gradually rolled-out throughout the country. In
a relatively weak infrastructural environment, this phased
strategy was considered more appropriate.


In addition to helping overcome the infrastructural constraints,
this phased-in strategy helped to effectively address
challenges associated with the change management
process. The geographical or sectoral expansion of the
service or deployment of new system features, at any point
in time, was marked by particular challenges. These varied
challenges included infrastructural, technological, human
resource and attitudinal challenges. However, the phased-
in deployment ensured these challenges were addressed
successfully.


The phased-in strategy enabled the PPP to control costs,
especially at remote border posts where it was compelled
to build much of the telecommunication and logistical
infrastructure. Predictably, the cost of implementing the
project escalated in the relatively less developed areas
where facilities were limited.


The phased-in strategy fostered cost-effective deployment,
but also helped to sustain the delivery of a consistent, high




CHAPTER II – BOOSTING ExPORT COMPETITIVENESS IN GHANA 35


quality service that met – and is meeting – stakeholders’
aspirations. The service delivery quality could not have
been properly controlled with a multi-pronged deployment.
As a result, the phased-in deployment was prudent and
contributed to the success of the project.


tanGible benefitS


The GCNet project strategy sought to demonstrate that the
reforms were creating tangible manifestations of success,
which had a positive effect on change management.


ƒ Customs officers were provided with a more congenial
work environment.


ƒ Users perceived improved, customer-friendly service.
ƒ Users also benefited from trade facilitation through quick


clearance times as well as quick permit and exemption
processing.


In this strategy, the PPP played an advocacy role, which
ensured that initially resistant regulatory agencies came to
perceive the benefits of the reforms.


Because of these tangible benefits and their positive impact
on operations, stakeholders were prepared to support
innovation and change, thereby contributing to the project’s
success.


traininG, SenSitization and caPacity
buildinG


The sensitization and training of users and capacity building
for various stakeholders were also critical success factors.
By 2007, 3,000 users had been trained to use various
functions of the system.


Users were provided with training in valuation, tax audits,
corruption and fraud detection. While not directly system
related, this training helped ensure that use of the system
was simplified and its benefits enhanced. The training
programme is both local within the services and external,
involving other governmental agencies, traders and the
public. The external training is used for a number of
purposes, including deepening know-how and exposure
to best internal practices, and as part of the performance
reward system to promote efficiency.


In addition to training, stakeholders are regularly sensitized
to new system add-ons and features. Their input is also
sought in the deployment process. In so doing, their buy-in
has been enhanced.


reSPonSiveneSS to emerGinG trendS


The capacity to respond promptly to emerging trends and
urgent requirements has also been a critical success factor.
GCNet has been able to take advantage of its PPP status
to immediately address unforeseen exigencies, such as
promptly reconfiguring the system to meet the requirements
of the re-denomination of the national currency by the Bank
of Ghana.


The PPP has been able to circumvent bureaucratic
constraints. For example, while the PPP procures through
tender processes, it has not been unduly constrained by
bureaucratic requirements to advertise over a certain
minimum period, as are purely governmental agencies or
donor-funded projects.


When it became necessary to capture declarations made by
oil marketing companies as they lifted petroleum products
from the refinery, GCNet was quick to adapt its system to
meet this demand. This was crucial in plugging revenue
leakages associated with petroleum product lifting by the oil
marketing companies.


Advantage was also taken of the PPP arrangement to
adopt new technologies to deliver an effective service that
responded to stakeholder needs and concerns. For example,
the PPP responded to the challenges posed by the increase
in transit trade and the need to eliminate the ineffective
escort system with a sophisticated satellite tracking system,
as illustrated above. These new technologies placed Ghana
Customs at the forefront of transit tracking in Africa.


SuStainable Self-financinG


To finance the initial cost of the GCNet project, the joint
venture partners contributed equity capital. With the
exception of one partner that contributed its equity in the
form of hardware, all the partners provided equity in cash.


To recoup this initial investment and generate adequate
revenue for replacing the initial investments, a fee structure
levied only on import declarations was established. The fee
structure was made mandatory, although certain sensitive
transactions, such as petroleum imports, were exempted
from fee payments. The partnership envisaged that through
this arrangement adequate revenue would be generated to
invest in new technology to ensure the systems continued
to operate at the cutting edge.


The PPP arranged a fee structure that ensured the project
does not depend upon government funding, but is able
to raise its own funding to cover operational expenditures
and finance new investments for replacement software,
hardware, systems upgrades and systems maintenance.
Investors recovered their investments through revenue from




CHAPTER II – BOOSTING ExPORT COMPETITIVENESS IN GHANA36


the fees charged by the PPP. From this revenue, equity
holders were paid dividends after the necessary corporate
statutory obligations and provisions for new investments
and expenditures were made.


imPlementation
challenGeS


Although the project was successfully implemented, a
number of challenges were encountered during the process,
including:


ƒ Overcoming individual and institutional resistance;
ƒ Ensuring compliance;
ƒ Upgrading processes in other agencies;
ƒ Assuring confidence and ensuring security.


overcominG individual and
inStitutional reSiStance


Two human factors posed significant challenges. First,
finding sufficient skilled personnel to operate the systems.
Second, the reluctance of people to change the way they
have done things in the past.


At the outset of the project, the computer skills of the
system’s target users were either nonexistent or at best
limited. A number of target users were reluctant to learn the
new skills required. To a large extent this was due to certain
vested personal interests. For example, some individuals in
key positions in the previous manual processes resisted the
changes. This stemmed from the fact that the transparent
electronic processes eliminated the possibility for them
to have personal contact with trade operators, with the
attendant loss of status and rent-seeking possibilities.


This resistance to change was also manifested at the
institutional level. The rationalization of operations
demanded a clear delineation of operational functions and
boundaries. In a few cases, this gave rise to institutional turf
wars, which led to a resistance to the revised new processes
and operational workflows, which delayed implementation
progress.


enSurinG comPliance


The general level of customs compliance in Ghana was low.
Ensuring a credible level of compliance was maintained
among trade operators, especially as attempts were made
to remove undue controls and facilitate trade. Some feared
that letting go of the previous manual controls would lead to
undue abuses.


This was due to the fact that declarations made by a
number of importers were questionable. Some compliance


officers were reluctant to accept innovations proposed in
the new system. These innovations included risk selectivity
and consignment targeting, designating certain declarants
as ‘Gold Card bearers’ that need not be subject to intrusive
examinations, and post clearance reviews to facilitate trade.


uPGradinG ProceSSeS in other
aGencieS


To fully realize the benefits of a seamless clearance process,
the manual, paper-based operations of other agencies within
the clearance process needed to be automated. Developing
and introducing complementary electronic systems for
other trade-related agencies posed another challenge
because not all systems became automated. For example,
with regard to port operations the electronic issuance of
bills of lading by the shipping lines to consignees or the
amendments of bills of lading when shipments are made
through consolidators – and the related payments – would
significantly have contributed to expeditious clearances.


GhanaTradeNet


GCMS


Banks


GCNet: Bank payment


Source: GCNet.


aSSurinG confidence and enSurinG
Security


A further challenge was the need to ensure the system’s
integrity was not breached and to assure and enhance
stakeholders’ confidence by consistently demonstrating
through its performance that the system was credible and
reliable. This was especially critical at a time when some
existing manual revenue and security controls were being
removed to facilitate trade.


At a time when reputable financial institutions were being hit
by a spate of frauds, a major challenge was to ensure that
the GCNet system, through which almost 60% of Ghana’s
tax revenue was collected, was not breached by intrusion,
spam or various viral infections that had hit a number of




CHAPTER II – BOOSTING ExPORT COMPETITIVENESS IN GHANA 37


systems around the world and brought operations to a halt.
The PPP ensured the system proved its mettle. With regular
upgrades and by applying appropriate security measures,
the challenge to assure the system’s robustness and
reliability was met.


concluSion


A number of factors contributed towards bringing the PPP
to fruition.


ƒ First, the Government supported the project and invested
through two public agencies, the CEPS and the GSC as
well as the Ghana Commercial Bank (GCB), in which it
held an equity stake.


ƒ Second, because the technology had a proven track
record, stakeholders’ and partners’ concerns were
alleviated. After reviewing a number of options, Ghana
modelled its TradeNet, technology and implementation
on the Singaporean model with its PPP arrangements.
The Singaporean model had proven to be a great
success, which assured the partners about the potential
of the GCNet PPP.


ƒ Third, all potential partners invited to join the venture
(especially those that eventually formed the partnership),
were credible, some having significant international
business operations with experience in complex ICT
projects. They were not seen as ‘cowboy operators who
were out for a kill’, but entities with a reputation to protect
and a will to execute a successful project.
SGS S.A. purports to be the world’s leading inspection,
verification, testing and certification company. GCB had
the largest branch network and the highest net worth of
any bank in Ghana at the formation of the PPP. Ecobank
was aspiring to surpass its original mission of being the
west African bank to being a pan-African bank.16


ƒ Fourth, GCNet’s business model is sound and ensures
that the system is used effectively for the mutual benefit of
all stakeholders. The PPP is designed to be self-financing
– a service mandate ensures customs declarations are
processed through the system for a regulated fee.
As a PPP, GCNet worked out a payment structure that
ensures it does not depend upon budgetary funding.
GCNet raises its own resources to cover operational
expenditure and finance new investments for replacement
hardware, systems upgrades, and for maintaining
systems integrity at levels that ensures GCNet operates
with leading edge technology.
GCNet invests continuously in ICT infrastructure,
hardware and software. Its operating systems are stable,
reliable, secure and meet high operational standards
and requirements. ICT capacity was developed with
substantial flexibility and scalability to meet client needs
and emerging exigencies. GCNet is committed to a
programme of new investments in ICT to ensure that it
deploys cutting edge technology, meeting international
best practices.


GCNet invested almost US$ 2 million in communications
to develop a secured and robust virtual private network
(VPN), including ownership of a radio frequency. The
VPN, comprising broadband fibre optic links, radio
networks, E1 links, dedicated leased lines and dial up
lines, is scalable to accommodate additional links that
may be required for other operations. The VPN stretches
across the country, including selected border points, and
covers every region.


GCNet has business continuity and disaster recovery
systems, including two data centres, which ensure
that the system is available on a 24-hour/7-day basis.
To assure the integrity of operations, promote quality
delivery to clients, and continued improvement in the
quality the service, GCNet introduced control regimes.
These control regimes include an effective security
system, operational controls, and quality management.


ƒ Fifth, the PPP is well managed by a team of professionals
that reports to a board of directors. From its membership,
the board is arguably one of the strongest corporate
boards in the country. GCNet adheres to good corporate
governance principles, with a code of ethics requiring
the highest standards of transparency. Full disclosure
principles are followed to foster prudent management
and reporting of corporate resources. GCNet also has a
number of technical partners, whose resource capacity
can be drawn upon.


The GCNet PPP is sustainable and has become the
benchmark for e-governance projects. It has proved its worth.
In Ghana, there are attempts to replicate its approach in all
new e-governance projects. Given its resounding success,
the PPP model provides an example of best practice and
could be replicated in other developing countries.




CHAPTER II – BOOSTING ExPORT COMPETITIVENESS IN GHANA38


endnoteS


1. Connecting the Trade Community, Société générale de surveillance
(SGS). Available at: http://www.sgs.com/gis-tradenet-07-en.pdf.


2. Heilman, J., G. Johnston, The Politics Of Economic Privatization, p. 197,
University of Alabama Press, 1992.


3. Fox, J., ‘An Evaluation Of Trade Capacity Building Programs. USAID
Behind The Border Trade Capacity Building’, Working Paper No. 14, pp.
7-8, The Louis Berger Group, October 2004.


4. The Ghana Trade and Investment Gateway Project (GHATIG) is a World
Bank funded project designed to attract export-oriented investments,
facilitate trade and enhance Ghanaian competitiveness through regulatory
reforms, capacity building and development of private participation in
infrastructural and systems development. Source: ‘World Bank Appraisal
Document’, Report No. 17736-GH, p. 7, 5 June 1998.


5. Customs, Excise and Preventive Service (Automation) Regulations,
Legislation Instrument (L.I. 1704), enacted 13 May 2002.


6. Customs, Excise and Preventive Service (Management) Law, 1993
(PNDC Law 330).


7. Face Vet was the process whereby manually completed Single
Administrative Document (SAD) forms were presented to a CEPS officer
to verify that the form had been properly filled in before data entry clerks
entered it into the computer.


8. After data entry, each SAD was presented to a CEPS officer for a unique
number.


9. In the case of transit declarations, the SAD had to be submitted to a unit
that administered the bond posted by the customs officer as a guarantee
against the potential duty and taxes payable on the consignment in the
event that it did not exit the country and was diverted on to the domestic
market. This unit is referred to as the Bond Seat.


10. Compliance Officers monitor and control declared consignments that
are selected for review and examination.


11. Help Desk Officers now assist with enquiries by declarants and
operators, for example, by explaining which process to follow and duty or
tax rates payable.


12. Doing Business Report 2005, World Bank-International Finance
Corporation.


13. Doing Business Report 2007: How to Reform, World Bank-International
Finance Corporation.


14. Ibid.


15. Ibid.


16. For more information: www.ecobank.com, www.gcb.com, and www.
singlewindow.sgs.com.






©
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to
ck


ph
ot


o




chaPter iii


thailand’s successful
journey
making inroads in regional and global
automotive networks


case study executive summary �������������������������������������������������������������������������������������������������������������������� 42


thailand’s responsive policy environment ������������������������������������������������������������������������������������������� 43


from import substitution to global integration ������������������������������������������������������������������������������ 44


industry evolution �������������������������������������������������������������������������������������������������������������������������������������������� 45


changing dynamics of production ����������������������������������������������������������������������������������������������������������� 46


the industry’s growing role in the economy �������������������������������������������������������������������������������������� 49


thailand’s position in production networks ��������������������������������������������������������������������������������������� 51


what drove thailand’s success? ����������������������������������������������������������������������������������������������������������������� 53


conclusion ������������������������������������������������������������������������������������������������������������������������������������������������������������ 55


annex i: charting trade and investment policies 1960-2008 ����������������������������������������������������������������������57


annex ii: the evolution of the denso affiliate in thailand, 1972-present ��������������������������������� 58




CHAPTER III – THAILAND’S SUCCESSFUL JOURNEy42


thailand’S SucceSSful journey
makinG inroadS in reGional and Global
automotive networkS


caSe Study executive
Summary


In many countries, the automotive industry has been the
target of government-led industrial development. The
sector is a driver of growth, employment, cutting-edge
technological expertise and is a stimulus to other sectors.
Automobiles are complex products, consisting of numerous
parts and components that involve different production
processes. Independent suppliers in industries such as
textiles, glass, plastic, electronics, rubber products, steel
and other metals manufacture many of these parts and
components.


Promoting the automotive industry can boost complementary
investments by auto parts firms, thereby creating an enabling
environment for broad-based industrial growth. However,
only a handful of developing countries have managed to
create an internationally competitive automotive industry
that delivers potential development dividends. In most
cases automotive production has been a high-cost activity
carried out within the confines of a protected domestic
market heavily relying on direct government support.


Over the past two decades, Thailand has emerged as a
vibrant hub of vehicle production for the regional and global
markets. Rapid expansion in the automotive industry has
spawned a parts and components supplier network in the
country, resulting in an impressive increase in local content
in Thai-made cars. This has transformed Thailand into the
‘Detroit of the East’1 with most of the major players in the
international automotive industry using the country as a
production platform.


Thailand’s proactive automotive sector policy represents
a highly successful, private sector led, market-oriented
strategy. Thai success in automotive production has been
underpinned by a favourable combination of three factors:


ƒ Structural changes in the global auto industry that
permitted countries in the periphery to join production
networks for regional and global markets;


ƒ Pragmatic, market-oriented policies that enabled the
domestic auto industry to evolve with trends in the wider
global economy;


ƒ The size of the Thai market that met the requirements of
domestic car assembly – in particular the one-tonne pick-
up truck – to achieve economies of scale.


The policy instruments used by Thai authorities during
the import substitution era were fundamentally the same
as those used by their counterparts in other developing
countries: tariff protection to entice multinational enterprises
(MNEs) to set up production plants for the domestic market
and local content requirements (LCR) to force these plants
to forge backward linkages with local auto part makers.


However, Thai policymakers implemented these policies in
a market-oriented manner in consultation with automakers
and other private sector stakeholders. At the same time,
Thailand was the first developing country member to honour
World Trade Organization (WTO) commitments.


This pragmatic approach was instrumental in winning
investor confidence and created a solid foundation for
building a world-class production base. Unlike Malaysia
and Indonesia, Thailand never pursued a national car
policy; both foreign and local companies were treated on
an equal footing. For a chronology of trade and investment
policies that had an impact on the Thai automotive industry
1960-2008, see annex I.


Another important factor is that by design or by sheer luck,
the Thai Government’s liberalization of the automotive
industry from the late 1980s coincided with the structural
shift in the industry towards the production of a ‘global car’.
Thailand benefited from a first mover advantage in attracting
global players to set up production bases in the country.
Abolishing LCR and ownership restrictions on local affiliates
of foreign firms set the stage for linking the domestic
industry to global production networks. Eliminating these
restrictions prompted and facilitated MNE automakers and
part suppliers to set up new affiliates and to bring more
advanced technology to the affiliates in Thailand.


The economic downturn caused by the global financial
crisis has had a notable adverse effect on the Thai auto
industry. Production declined from 124,656 units in October
2008 to 53,644 units in April 2009, the lowest since the
1997–1998 Asian financial crisis. From May 2009, vehicle
production has begun to recover. The recovery appears to
be gradual and a V-shaped rebound is unlikely. Prospects
for expanding exports to emerging markets have not been




CHAPTER III – THAILAND’S SUCCESSFUL JOURNEy 43


severely affected. However, demand in developed countries
– the EU in particular, which accounts for nearly half of total
exports – is likely to remain subdued for at least the next two
to three years.


This case study examines the growth and the current state
of Thai automotive industry,2 focusing on the factors that
underpinned the successful transition from the country’s
import substitution phase to global integration through
export expansion. It aims to broaden understanding of
Thailand’s success factors and to help frame policies for
better outcomes in an era of rapid structural change in
vehicle production at national, regional and global levels. It
is based on data and information gathered from two main
sources.


The discussion on automotive policy and trends and patterns
of production and trade in Thailand is based on a survey of
previous studies and analysis of data gathered from various
secondary sources. The information used in analyzing firms’
perception of government policy and the nature of linkages
between automakers and parts producers in Thailand come
from firm level surveys conducted during June-August 2006
and August-September 2009.3 The surveys covered 41 firms
– five carmakers and 36 auto part suppliers – located in the
automotive clusters in the Rayong and Chonburi provinces.


thailand’S reSPonSive
Policy environment


As part of the country’s overall industrialization strategy, the
Thai automotive industry has evolved through two distinct
phases. From the early 1960s until the late 1980s import
substitution drove the development strategy. During this
period, the Thai Government enticed carmakers to set up
assembly plants in the country by providing tariff protection
for vehicle manufacture and imposing LCR to promote local
parts manufacture. From 1990 onwards the Government
has begun to rely on market mechanisms. For a chronology
of trade and investment policies that had an impact on the
Thai automotive industry 1960-2008, see annex I.


SettinG the StaGe for induStrial
Growth


As in many developing countries, Thailand’s automotive
industry was one of the first targets of industrial development
through import substitution. In the early 1960s, tariffs were
imposed on imports of completely built units (CBU) of
passenger cars (60%), vans (40%) and pick-up trucks (20%).
Tariff rates applicable to imports of completely knocked
down (CKD)4 kits and parts of each of the three categories
were set at half of the CBU rates. High-end product tariffs
combined with lower tariffs on imported inputs naturally
favoured domestic assembly of imported vehicles. Motor
vehicle tariffs were the highest in Thailand’s overall import
duty structure during the ensuing four decades.


From 1960, the Government embarked on an investment
promotion policy to complement protectionist trade policy.
The Board of Investment (BOI) was established to approve
foreign investment projects and implement investment
promotion measures under the Investment Promotion Act
(1960). The BOI introduced a range of investment promotion
measures, including income tax breaks for approved
investment projects. Unlike in many other developing
countries, investment promotion policy in Thailand treated
domestic and foreign investors equally. A revision to the
Investment Promotion Act in 1977 stipulated majority Thai
ownership in domestic market oriented joint venture firms,
which are firms that sell more than 70% of output in the
domestic market. Other than this ownership restriction,
foreign investment policy remained highly liberal throughout
the ensuing years. Foreign firms had the option of setting up
affiliates in Thailand without obtaining BOI approval.5


By the late 1960s, there was a growing concern that the
nascent automobile industry had failed to set the stage for
broad-based industrial growth through backward linkages
with the local parts and components industry. In response,
the Government set up a multistakeholder Automotive
Development Committee (ADC) in 1969, comprised of
officials from BOI, the Ministry of Industry, the Ministry
of Finance, the Ministry of Commerce and the Bank of
Thailand, as well as representatives of Automobile Industry
Club and the Association of Thai Industries. The ADC had a
mandate to design and implement LCR measures.


According to the LCR system designed by ADC that came
into effect in 1975, domestically assembled passenger
vehicles had to use locally produced parts equivalent
to 25% of the total value of the vehicle to qualify for the
import of CKD kits and auto parts. The LCR requirement
for commercial vehicles and pick-up trucks was set at 15%.


The introduction of the LCR system was accompanied by
an upward adjustment in import tariffs on CBU units of
passenger vehicles, vans and pick-up trucks to 80%, 60%
and 40%, respectively, combined with an increase of the
respective rates on CKD kits to 50%, 40% and 30%.6 As a
further measure to promote local content, in 1978 an import
ban was imposed on CBU passenger vehicles and import
duties on CKD kits were increased to 80%. The tariffs on
CBU units and CKD kits of vans and pick-up trucks were
increased to 80% and 60%, respectively. Approval of new
automobile assembly plants was withheld in 1978 because
the existing plants were running under capacity. In 1984,
domestic assembly of passenger cars was limited to two
models each of 42 brands.


The new LCR system soon encountered implementation
problems for two reasons. First, the value-based LCR
calculation was sensitive to exchange rate fluctuations,
making it difficult to calculate the domestic currency value
of the imported parts. Second, there was evidence of
widespread manipulations of the system by carmakers by
understating the value of CKD kits on shipping documents
and over-invoicing the value of local purchases. To redress




CHAPTER III – THAILAND’S SUCCESSFUL JOURNEy44


these problems the ADC, in consultation with the carmakers,
developed a new point-based LCR system. Under the new
system, effective 1983, every car part was assigned a point
and auto assemblers were required to use locally produced
parts up to a minimum mandatory total, initially set at 50
points. This was reduced to 45 points in the following year
in response to requests by automakers.


In 1983, then-Minister of Industry Ob Vasuratna debated
the idea of a Thai vehicle project that aimed to increase the
local content of domestically assembled cars first to 70%
and then to 100% within a period of 10 years. Local parts
manufacturers warmly welcomed the project, but it faced
strong resistance from the carmakers, in particular from
Toyota, the largest local car assembler in the country.7 The
major concern of carmakers was that the high LCR could
depress domestic demand for both vehicles and parts
with adverse implications for the growth of the nascent car
industry. The underlying logic of the argument was that
given the prevailing ban on CBU imports, carmakers could
easily pass the increase cost resulting from high LCR on to
customers.


The Government’s compromise response involved two key
elements. First, the LCR target for passenger cars was set
at 54 points based on a two-way classification of auto parts
– a mandatory list (Account A) and selective list (Account
B) – with LCR points divided equally between the two lists.
Carmakers were required to adhere strictly to Account
A in procuring inputs and they were permitted to choose
items freely from Account B. If any of the parts in list A was
not available locally, carmakers could select substitutes
from the selective lists to fulfil the requirement. Account A
consisted of several parts that most carmakers had already
been procuring domestically, such as radiators, batteries,
wiring harnesses, mufflers, wheels and tyres, glass doors
and rear springs. As a result, there was little resistance from
carmakers to the new system.


Second, a new project aimed at local production of diesel
engines for one-tonne pick-up trucks was launched. The
One-Tonne Diesel Engine project included two key elements:


ƒ Giving government approval to three selected firms:
Siam Toyota Manufacturing, Isuzu Engine Manufacturing
and Thai Automotive Industry (a Nissan affiliate) to
locally produce diesel engines for one-tonne pick-up
trucks subject to specific LCR and export performance
requirements;


ƒ Creating a captive market for the engine producers by
requiring local assemblers of one-tonne pick-up trucks to
use only locally produced engines.


economieS of Scale


The Government gave approval to only three to firms as
it believed this would enable them to achieve efficiencies
through economies of scale. The LCR applicable to engine
manufacturers stipulated that they use at least 20% local


engine parts in the first year (1989), increasing by 10%
every year to achieve 70% local content by the end of the
seven-year implementation period. The producers were
given flexibility to decide what components to procure
locally, subject to the condition that by 1995 they achieve
full localization of casting, forging and machining of
cylinder blocks, cylinder heads, crankshafts, camshafts
and connecting rods. According to the export performance
requirement, an engine manufacturer had to export in gross
value not less than 120 million baht (around US$ 4.8 million)
worth of engines during the first four years, and at least
280 million baht (around US$ 11.2 million) in each of the
subsequent three years.


The diesel engine for one-tonne pick-up trucks was selected
as the target of this project after assessing domestic demand.
At the time, this vehicle model had the largest domestic
demand among all vehicles assembled in Thailand because
of its popularity among farmers and urban vendors. Annual
production volume was rapidly approaching the 100,000
mark by the mid-1990s.8 In addition, the one-tonne pick-up
truck is largely a homogenous product, whereas a given
brand of passenger vehicle has a number of models. This
greatly facilitated achieving economies of scale.


The ADC designed this project based on extensive
consultation with the relevant private sector stakeholders.
For instance, in the original LCR scheduled prepared by the
ADC the final LCR target was 80% to be achieved by 1992.
Based on requests by producers, this was subsequently
reduced to 70% and the implementation period was
extended by three years.


The project was strongly supported by the large Thai-
owned agglomerated company, Siam Cement Group,
whose subsidiary, Siam Nawaloha Foundry (SNF), was
successfully manufacturing agriculture diesel engines
under a joint venture arrangement with Kubota Corporation
of Japan.


from imPort SubStitution
to Global inteGration


Since the late 1980s there has been a shift in Thai automobile
policy from domestic market orientation and towards global
integration, setting the stage for the country to emerge as
centre of automobile and auto part manufacturing in the
region. The Thai economy entered a period of rapid growth
in 1988. The resulting increase in domestic demand caused a
shortage of locally assembled vehicles. In response, in 1990
the Government repealed the limits on the number of series
of cars permitted for local production. In the following year
the import ban on new cars was lifted. Since then, imports
of automobiles have remained free of quantitative restrictions,
with the exceptions of non-automatic licensing for the
importation of certain types of diesel engines and a ban on
motorcycle engines and used passenger cars.9




CHAPTER III – THAILAND’S SUCCESSFUL JOURNEy 45


During 1998-2000, the Thai Government was the first
developing country to honour its commitment under the WTO
Agreement on Trade-Related Investment Measures (TRIMS).
In 1999, all selective incentives granted to export oriented
activities and the 49% equity ownership requirement on
domestic market oriented projects was abolished. LCR was
abolished effective January 2000.


In 1995 Thailand became a signatory to ASEAN’s Brand-
to-Brand Complementation programme,10 which aimed
to promote trade in parts and components among auto
companies operating in ASEAN member countries. It
provided for 50% reduction in prevailing import duties on parts
and components among member countries, while treating
these imports as local content in estimating the minimum
local content of the final products (40%) applicable to duty
concessions under the ASEAN Free Trade Agreement.


Since 2002 Thailand has signed a number of bilateral free
trade agreements (FTAs). Of these, the Thai-Australia FTA
and the Thai-New Zealand FTA have been in operation since
2005. The FTA with Japan came into effect in 2007.


In addition to these preferential tariff reductions, general MFN
tariffs on CBU passenger vehicles and CKD kits were reduced
in stages starting in 1992, exposing the domestic auto industry
to increased import competition. However, automotive tariffs
continued to remain high with a pronounced cascading
pattern. Duties on CKD kits ranged from 10%-30%. Rates
on CBU automobiles ranged from 20%-80%, depending on
the type of vehicles. Given the cascading nature of the tariff
structure, the effective rate of protection (ERP)11 for domestic
motor vehicle production is much higher than the average
tariff. According to estimates based on data for 2005, the
effective rate of protection for producing automotives for the
domestic market is as high as 64.8% compared to the overall
manufacturing average of 24.4%.12 An important issue is how
the Thai industry achieved notable export success under a
trade regime that continued to have a significant anti-export
bias, as reflected in a relatively high rate of effective protection
for production for the domestic market. This issue is discussed
later in the case study.


induStry evolution
Following the imposition of import tariffs in the early 1960s,
multinational carmakers, which until then had served the
Thai market through exports from their home bases, set up
assembly plants in Thailand. By the late 1960s six Japanese
carmakers (Toyota, Honda, Nissan, Mitsubishi, Daihatsu
and Isuzu), three European carmakers (Volvo, Renault and
Mercedes) and the two American carmakers (Ford and
General Motors) were present in Thailand. Many of them,
especially Japanese carmakers, operated through joint
ventures with large local conglomerates, although foreign
ownership restrictions were not implemented until 1977.


With the sharp increase in oil prices during the early
1970s, there was a sharp decline in domestic demand for


automobiles, accompanied by a notable shift in demand
to smaller-engine vehicles. As a result, five non-Japanese
carmakers ceased to operate in Thailand. Because the
Government suspended approval of new assembly plants
and imposed an import ban on CBU vehicles in 1978, the
number of carmakers remained unchanged at 12 for the
next two decades. (Both local and foreign. See table 4.)13


Until the implementation of LCR measures in 1975, local
car assembly predominantly used imported parts and
components. At the time, there were about 20 parts and
component manufacturers, but they were producing mostly
for the replacement equipment market (REM) that supplies
spare parts. Following the imposition of LCR, multinational
car manufacturers began procuring parts locally. Some
Japanese part producers established plants in Thailand.


At the same time, some carmakers engaged REM firms as
original equipment manufacturers (OEM) suppliers. The
number of parts manufacturers increased to around 180
enterprises by 1980. The range of locally manufactured
auto parts widened and included rubber parts, suspension
systems, radiators, inner panel pressed parts, brake drums,
gaskets, pistons, safety glass, electrical equipment and
wiring harnesses. Because the part producers tended to
locate closer to their customers to meet the requirements of
just-in-time production, the LCR mechanism set the stage
for forming production clusters in the Rayong and Chonburi
provinces.


The three firms involved in the One-Tonne Diesel Engine
project (Toyota, Nissan and Isuzu) began to implement
their production plans in the late 1980s. In 1986, Nissan
expanded its operations aiming to export pick-up trucks to
the Republic of Korea, Malaysia, Australia and New Zealand.
That same year, Isuzu announced a three-step export plan
for producing engines and pick-up trucks. Together, the
three firms designed a production sharing arrangement to
make implementing the project feasible, particularly in the
areas of casting, forging and machining processes. Under
this arrangement, each firm agreed to produce components
to be exchanged among them.


Ford, Daimler Chrysler and General Motors (GM) re-
entered Thailand in the mid-1990s with the prime objective
of producing one-tonne pick-up trucks. Following its 1993
merger with Mazda, Ford resumed vehicle assembly in
Thailand in 1995 using Mazda’s existing production base.
That same year Daimler Chrysler re-entered the Thai auto
industry through its merger with Mitsubishi. GM established
its own new assembly plant 1996.


Production capacity in the car assembly industry began
to increase rapidly from the second half of 1990s. Total
production capacity increased ten-fold, from 160,000-
1.6 million, between 1989-2006. Japanese carmakers
accounted for over 90% of the total installed capacity, with
Toyota alone accounting for one-third (see tables 4 and 5).
One-tonne pick-up trucks accounted for 57% of the total
capacity.




CHAPTER III – THAILAND’S SUCCESSFUL JOURNEy46


The expansion of the auto assembly industry through
multinational participation was accompanied by a similar
expansion in the local auto parts industry. Auto parts
manufacturers, which had already entered Thailand,
expanded their operations. The expansion of Japanese auto
parts maker Denso in Thailand provides an example. Denso
first set up a factory in 1972 to produce cooling systems. It
then established two new factories in 1995 and 2000 and an
additional five since then to produce a wide range of auto
parts. To track the evolution of Denso’s growth see annex II.


Many foreign part suppliers, which had been operating
through joint ventures with local partners, expanded
production capacity following the removal of the ownership
restriction in 1998 by increasing their equity and, in some
cases, by acquiring full ownership. With change in ownership,
multinationals introduced cutting edge technology, better
managerial practices and close supervision of assembly
and production by bringing in foreign technicians and
managers.


Until the mid 1990s, Japanese companies dominated the
foreign segment of the Thai auto parts industry. Since then,
several world-class non-Japanese parts manufacturers
have entered the industry. By 2008 there were around 700
first-tier firms and 1,100 second- and third-tier firms in the
Thai auto parts industry.14


chanGinG dynamicS of
Production
Automobile production increased annually over 10% from
the mid-1980s, passing 500,000 by 1996 (see figure 5).


This impressive growth was interrupted by the financial
crisis during 1997-1999, but production had regained the
1996 pre-crisis level by 2002. Output expansion during
the ensuing years, when industry became increasingly
export-oriented, was much faster. Between 2002-2008, total
production increased from 800,000 to more than 1.4 million,
an annual compounded rate of over 20%. In 2008, Thailand
was the 14th largest auto producer in the world, accounting
for 2% of the total global output. It was by far the largest
auto producer in ASEAN and the fifth largest in Asia after
Japan, the Republic of Korea, China and India (see table 6).


From the early 1980s, commercial vehicles accounted for
nearly 70% of total domestic vehicle production. However,
the share has declined from 2005 reflecting diversification
to passenger cars. One-tonne pick-ups account for 90%
of commercial vehicle production. Production of pick-ups
increased from 47,000 in 1985 to 410,000 in 1995 and to
more than 950,000 in 2008.


The economic downturn caused by the global financial
crisis has had a notable adverse effect on the Thai auto
industry. Production declined from 124,656 units in October
2008 to 53,644 units in April 2009, the lowest since the
1997-1998 Asian financial crisis. From May 2009, vehicle
production has begun to recover. The recovery appears to
be gradual and a V-shaped rebound is unlikely. Prospects
for expanding exports to emerging markets have not been
severely affected. However, demand in developed countries
– the EU in particular – which accounts for nearly half of total
exports, is likely to remain subdued for at least the next two
to three years.


Table 4: Production capacity (units) of Thai car assemblers, 1989-2006


Car manufacturer 1989 1994 1999 2003 2005 2006


Toyota 24 000 100 000 200 000 240 000 350 800 450 000


Mitsubishi 40 000 126 600 160 000 190 200 170 200 208 000


Isuzu 27 400 83 200 140 600 189 600 200 000 200 000


General Motor – – 40 000 40 000 100 000 160 000


Auto Alliance & Mazda 7 200 8 400 135 000 135 000 135 000 155 000


Nissan 23 520 96 500 113 100 124 000 102 000 134 400


Honda 8 220 39 000 70 000 80 000 120 000 120 000


Hino 9 600 9 600 9 600 28 800 28 800 28 800


DaimlerChrysler 2 340 4 600 14 900 18 100 16 300 16 300


yMC Assembly 12 000 12 000 12 000 12 000 12 000 12 000


Volvo 6 000 6 000 6 000 6 000 10 000 10 000


BMW – – – – 10 000 10 000


Total 160 280 485 900 901 200 1 063 700 1 255 100 1 576 500


Source: Thai Automotive Industry Association.
Note: Dashes indicate information that is not available.




CHAPTER III – THAILAND’S SUCCESSFUL JOURNEy 47


Table 5: Production capacity of carmakers classified by type of vehicles, 2006


Passenger cars
Commercial


vehicle
One-tonne pick-ups Other cars Total


(1) (2)=(3)+(4) (3) (4) (5)= (1)+(2)


Toyota 200 000 250 000 200 000 50 000 450 000


Mitsubishi 50 000 230 000 150 000 80 000 208 000


Isuzu – 200 000 180 000 20 000 200 000


General Motor 40 000 120 000 120 000 – 160 000


Auto Alliance – 155 000 150 000 5 000 155 000


Nissan 36 000 98 400 96 000 2 400 134 400


Honda 120 000 – – - 120 000


Hino (Suzuki) – 28 800 – 28 800 28 800


Daimler Chrysler 16 300 – – – 16 300


yMC Assembly 12 000 – – – 12 000


BMW 10 000 – – – 10 000


Volvo 10 000 – – – 10 000


Total capacity 494 300 1 082 200 896 000 186 200 1 576 500


(% share) (31) (69) (57) (12) (100)


Source: Thai Automotive Industry Association.


Notes: Number in parenthesis is percentage share of total production capacity. Dashes indicate information that is not available.


Figure 5: Volume of vehicle production and share of vehicle exports, 1961-2008


1980 1982 1984 1986 1988 1990 1992 1994 1998 2000 2002 2004 2006 2008
0


10


20


30


40


50


60


70
Export share (%)


1996


Production, ´000 units
1 600


1 400


1 200


1 000


800


600


400


200


0


Production (1 000 units) LHS axis
Export share in production (%), RHS axis


Source: Based on data provided by the Thai Automotive Association.




CHAPTER III – THAILAND’S SUCCESSFUL JOURNEy48


exPort trendS and PatternS


The first motor vehicle exports from Thailand by MMC
Sittipol, the Mitsubishi affiliate, were in 1988. However,
until the late 1990s the Thai automotive industry remained
heavily domestic market oriented, with exports on average
accounting for less than 5% of total sales. Export volume
measured in units recorded an over five-fold increase
between 2000-2008, from 153,000 to 838,000 units. In
monetary terms, this increase was even greater, from
US$ 2.8 billion to US$ 195 billion, reflecting a shift in exports
towards higher-value items. Automobile exports’ share
of total exports from Thailand increased from 1.5% in the
1990s to 13% in 2008 (see figure 6).


In the 1990s, parts and components accounted for over
75% of total automobile exports. Since then, this share
has declined sharply reflecting a shift in exports toward
completely built vehicles. However, parts and components
still account for about 20% of total exports (see figure 7).


Table 7 provides data on the composition of vehicle exports.
One-tonne pick-ups remain the dominant type among


exported vehicles. However, between 1999-2007, their share
in export value has declined sharply from 74.6% to 42.6%.
Smaller passenger cars (1,000-1,499 cc.) accounted for
the export share gains. The share of larger passenger cars
(1,500-3,000 cc.) has also increased.


Since the early 1990s, automobile exports from Thailand
have undergone notable geographic changes (see table 8).
Most significant is the sharp increase in the market share of
ASEAN-10 countries – from 6.7% during 1999-2001 to 20%
during 2006-2007. This increase likely reflects preferential
tariff access to these markets. However, extra-regional
exports still account for most of total motor vehicle exports,
with a notable shift from the EU-15 Member States to other
countries, especially the Middle East.


Exports to Japan and the United States account for a tiny
share in total exports. Japan’s share is consistent with
the export patterns for other manufactured exports from
Thailand and other countries in the region, and reflects the
pattern of Japanese firms using production in other East
Asia countries to export to third country markets.15 The
small export share to the United States is understandable
because all major international carmakers have production


Table 6: World motor automobile production – top 20 producing countries, 2000 and 2008


2000 2008


Rank Country
Production,
(’000 units)


Share (%) Country
Production,
(’000 units)


Share (%)


1 United States 12 800 21.9 Japan 11 564 16.4


2 Japan 10 141 17.4 China 9 345 13.3


3 Germany 5 527 9.5 United States 8 705 12.3


4 France 3 348 5.7 Germany 6 041 8.6


5 Republic of Korea 3 115 5.3 Republic of Korea 3 807 5.4


6 Spain 3 033 5.2 Brazil 3 220 4.6


7 Canada 2 962 5.1 France 2 569 3.6


8 China 2 069 3.5 Spain 2 542 3.6


9 Mexico 1 936 3.3 India 2 315 3.3


10 United Kingdom 1 814 3.1 Mexico 2 191 3.1


11 Italy 1 738 3.0 Canada 2 078 2.9


12 Brazil 1 682 2.9 Russian Federation 1 790 2.5


13 Russian Federation 1 206 2.1 United Kingdom 1 650 2.3


14 Belgium 1 033 1.8 Thailand 1 394 2.0


15 India 801 1.4 Turkey 1 147 1.6


16 Poland 505 0.9 Islamic Republic of Iran 1 051 1.5


17 Czech Republic 455 0.8 Italy 1 024 1.5


18 Turkey 431 0.7 Poland 951 1.3


19 Thailand 412 0.7 Czech Republic 946 1.3


20 Chinese Taipei 373 0.6 Belgium 724 1.0


Total Top 20 55 379 94.9 Top 20 65 053 92.2


Total World 58 374 100 World 70 527 100


Source: Thai Automotive Industry Association.




CHAPTER III – THAILAND’S SUCCESSFUL JOURNEy 49


plants in the United States and/or use production bases in
Latin America, particularly in Mexico, to serve the American
market.


the induStry’S GrowinG
role in the economy


From 1960 until the late 1990s, automotive industry growth
in Thailand was compatible with that of the manufacturing
sector. The ensuing years have seen much faster growth,


lifting the automobile industry’s share in GDP to about 8%
by 2008. Automotive industry employment has grown over
time, but at a slower rate, from about 3.3% in the 1990s to
4.5% – around 350,000 workers – in 2008.


The gap between output and employment reflects the
relatively high capital intensity of the automobile industry
compared to the average in total manufacturing. The value
added per worker is a rough indicator of capital intensity
of production. This value added per worker in transport
equipment manufacture is about three times that of total
manufacturing.16


Figure 6: Share of automotive exports in total merchandise exports from Thailand, 1990 to 2008


0


2


4


6


8


10


12


14


1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008


Share in total merchandise exports (%)


Source: International Trade Centre, based on data compiled from UN Comtrade Database.


Figure 7: Automobile exports from Thailand, 1990-2009


0


5000


10000


15000


20000


25000


1990




0


5


10


15


20


25


30


35


40


45


Motor vehicles (CBUs), RHS axis
Total automotive products, RHS axis
Share of parts and components, LHS axis


Share of parts and componentsExports, US$ million


1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009


Source: International Trade Centre, based on data compiled from UN Comtrade Database.




CHAPTER III – THAILAND’S SUCCESSFUL JOURNEy50


Table 7: Automobile exports and imports classified by vehicle type, 1999-2007


1999 2000 2001 2002 2003 2004 2005 2006 2007


Export (US$ million) 1 275 1 627 1 924 1 968 2 649 3 858 5 198 6 648 8 227


Percentage share


Passenger car 1 000-1 499 cc. 1.1 1.4 1.2 2.5 14.1 16.1 9.4 8.8 7.9


Passenger car 1 500-3 000 cc. 7.1 8.8 21.9 14.9 14 10.4 18.9 22.7 23.3


One-tonne pick-ups 74.6 70.7 54.9 61.1 55.5 54.9 44.1 47.1 42.6


Import (US$ million) 558 526 382 417 618 608 795 772 1 013


Percentage share


Passenger car 1 500-3 000 cc. 60.9 33.4 39.8 27.1 50.3 34.5 33.0 23.8 18.6


Passenger car larger than 3 000 cc. 5.4 8.8 8.5 12.9 9.9 8.8 5.6 5.8 4.2


Bus 7.9 18.6 13.2 18.4 11.8 17.1 28.9 28.9 32.7


Truck 5.3 11.8 15.3 14.7 6.8 7.1 5.4 5.4 7.3


Source: International Trade Centre, compiled from UN Comtrade Database.


Notes: Passenger cars 1,000-1,499 cc., 1,500-3,000 cc. and greater than 3,000 cc. are referred to HS870322, 870323 and 870324, respectively.
One tonne pick-up truck is HS870421 whereas bus and truck are HS8702 and 8704, respectively.


Table 8: Direction of automobile exports from Thailand, 1999-2007 (%)


ASEAN-10 Indonesia Philippines Australia Japan
United
States


EU-15 Others
Total
(US$


million)


1999-2001


Passenger cars 11.9 1.5 0.1 14.8 9.7 0.0 45.4 62.3 353.1


Trucks 4.5 0.2 0.7 23.8 0.1 0.0 41.8 71.6 1 266.7


Others 73.6 3.1 1.1 1.5 0.3 5.3 3.1 24.1 14.2


Total 6.7 0.5 0.6 21.7 2.2 0.1 42.2 69.2 1 634.1


2002-2005


Passenger cars 50.1 21.3 10.6 14.9 7.8 0.0 9.5 26.3 1 134.4


Trucks 6.8 2.7 0.9 23.0 0.2 0.0 32.4 70.1 2 223.2


Others 77.4 1.0 0.4 1.4 0.5 1.0 2.0 20.4 26.0


Total 21.8 8.9 4.1 20.1 2.7 0.0 24.5 55.0 3 383.5


2006-2007


Passenger cars 34.3 10.7 9.6 29.9 1.6 0.2 1.8 34.2 3 387.7


Trucks 5.8 2.5 1.0 18.6 0.2 0.0 27.5 75.4 3 990.3


Others 77.6 2.2 0.1 16.2 0.5 0.2 0.7 5.6 59.7


Total 19.4 6.2 4.9 23.7 0.9 0.1 15.6 56.0 7 437.6


Source: International Trade Centre, compiled from UN Comtrade Database.




CHAPTER III – THAILAND’S SUCCESSFUL JOURNEy 51


There is a major debate in Thailand on the extent to which the
growth of the auto industry has added value to the national
economy. Many studies in the early 1990s estimated very low
value added, less than 20%.17 However, firm level surveys
suggest that value added would have significantly increased
during the ensuing years as the local production of parts
and components has rapidly increased in line with output
expansion. More than 90% of parts and components in locally
assembled cars are now sourced locally, although the import
content of some automotive components is still high.


Data needed for precise estimates of domestic value added
are hard to come by. However, some idea about the overall
trends in domestic value added in line with output expansion
can be obtained by looking at the co-movement of parts and
components imports and domestic automobile production.
One way of doing this is to calculate the real value of parts
and components imports – after adjusting import value for
changes in prices – per unit of local production per locally
assembled vehicle.


The real US dollar value of parts and components per vehicle
at 1988 prices has declined sharply from about US$ 8,500
in the early 1990s to around US$ 2,000 in 2007. This pattern
is consistent with the findings from the firm level survey. The
rate of decline is much sharper during the period after the
abolition of LCR requirements compared to the preceding
period. This suggests that the market-driven process of
localization of the auto industry has yielded a much better
outcome compared to the outcome of the LCR regime.


thailand’S PoSition in
Production networkS


The data summarized in table 9 shows the relative
importance in Thailand of individual carmakers and
Thailand’s relative importance as a production base for
these firms in their global operations. Japanese automakers
dominate automobile assembly in Thailand, accounting
for over 80% of total output. The two largest American
carmakers – General Motors and Ford – accounted for
a mere 7.5% of total production in 2008.18 Production in
Thailand accounted for about one-fifth of total automobile
production by Japanese firms in Asian countries, excluding
Japan. However, Thailand accounts for a much smaller
share of the total global production of Japanese firms, at
4.1% in 2008. For the American firms, the share is less at
0.8%.


For all carmakers listed in figure 8, Thailand is the regional
production base for one-tonne pick-ups. These firms use
a platform production strategy to produce one-tonne
pick-ups for more than 100 countries. In the platform
production strategy, automakers use a small number of
under-body platforms as the basis for a greater number of
vehicle models. This strategy reduces the costs of platform
development and enables component sharing among
models. For example, platform sharing between Chrysler


and Mitsubishi allowed Mitsubishi to reduce its number of
light-vehicle platforms from 12 to six. Honda Odyssey and
Accord share the same platform, as do Ford Everest and
Mazda Fighter.


What is the role of Thailand in global automobile production
networks? Figure 8 helps answer this question. Toyota,
which has continuously accounted for the largest share in
production in Thailand of both passenger cars and pick-
ups, uses the country as a production and export base
of small-to-medium passenger cars and one-tonne pick-
ups. Toyota exports the cars mostly to Southeast Asian
countries, Australia and New Zealand. Toyota exports pick-
ups primarily to Europe.


Passenger cars manufactured by Honda in Thailand are
exported to other Southeast Asian countries, whereas
Honda Stream is produced in Indonesia and exported to
other countries in the region, including Thailand. Ford
and Mazda use their production base in the Philippines
for producing passenger cars – Ford Laser, Ford Escape,
Mazda Protégé, and Mazda Tribute – for the other countries
in the region, including Thailand.


linkaGeS: aSSembler and PartS
SuPPlierS


As global competition intensifies, multinational carmakers
increase local parts procurement to strengthen their
international competitiveness. Many vehicle parts have
high weight-to-value ratios and some are bulky. Therefore,
there is substantial cost in procuring parts from distant
suppliers. Close cooperation between manufacturers and
parts suppliers is also needed to match production plans
and delivery schedules to ensure just-in-time production
while maintaining quality. Local procurement also reduces
exposure to exchange rate risk. These considerations
explain the tendency for geographic clustering of the
automobile industry, with car assemblers at the centre
surrounded by part suppliers.


According to ADC records there are 1,454 indigenous part
suppliers in Thailand. Of these, 354 are first-tier suppliers,
while the rest operate at the second- and third-tier in the
supply chain. The first-tier suppliers design and manufacture
modules, not just individual parts and components. They
deal directly with car manufacturers. Second- and third-
tier suppliers produce parts and components for first-tier
suppliers.


Currently there are about 10 local firms among the first-tier
suppliers that are truly involved in design and manufacture
modules. The other local firms manufacture simple inner
body parts. Prior to the abolition of ownership restriction on
foreign affiliated firms in 1997, there were many more first-
tier local suppliers operating under technology licensing
agreements with foreign part producers. Since then, the
technology owners have taken over most of these local
firms.




CHAPTER III – THAILAND’S SUCCESSFUL JOURNEy52


Table 9: Automobile (CBU) production1 in Thailand classified by carmakers, 2000 and 2008


2000 2008


Production Thai share
in Asian


production2


(%)


Thai share
in world


production3
(%)


Production Thai share
in Asian


production2


(%)


Thai share
in world


production3
(%)


Units
(’000)


(%)
Units
(’000)


(%)


Japanese
carmakers


239 58.1 23.0 1.1 1 135 81.4 20.8 4.1


Toyota 63 15.3 21.1 1.1 573 41.1 34.6 6.2


Honda 36 8.7 25.1 1.4 162 11.6 20.3 4.1


Nissan 19 4.6 20.2 0.7 74 5.3 14.0 2.2


Mazda 30 7.3 68.9 3.2 48 3.5 30.1 3.6


Mitsubishi 91 22.1 19.8 5.0 173 12.4 57.6 13.1


Isuzu 67 16.3 39.6 12.4 135 9.7 64.7 25.1


US
carmakers


9 2.1 22.1 22.1 105 7.5 4.5 0.8


GM 9 2.1 22.1 0.1 104 7.5 5.2 1.3


Ford4 – – – – 1 0.1 0.3 0.0


Other 164 39.9 1.7 0.6 153 11.0 1.6 0.5


Total 412 100.0 3.1 0.7 1 394 100 8.0 2.0


Source: Compiled from the International Automobile Association database (http://www.oica.net/).


Notes: 1. Production comprises passenger cars and commercial vehicles, including light commercial vehicles, heavy commercial vehicles and
heavy bus and coach.


2. Excluding Japan.
3. Including production in the source country of the carmaker.
4. Ford not in production where dashes appear.


Figure 8: Pattern of regional division of labour of the automotive industry in Southeast Asia


Thailand


Indonesia The Philippines


Honda Stream
Peugeot 206


Honda Stream Ford Laser Ford Escape
Mazda Protégé


Ford Lynx Ford Escape


Mazda Protégé


Mazda Tribute


Ford Ranger
Ford Everest
Mazda Fighter
Volvo S80
Chevrolet Zafira
Honda Accord
Honda City
Nissan Sentra
Nissan Cenfiro
Toyota Altis
Toyota Vios
Isuzu D-Max
BMW 3/5 Series


Mazda Tribute


Ford Everest Ford Ranger
Mazda Fighter (planned)
BMW 3/5 Series Chevrolet Zafira
Honda City Honda Accord
Mitsubishi Lancer Toyota Vios/Hilux
Isuzu D-Max/SUV


Source: Firm interviews.




CHAPTER III – THAILAND’S SUCCESSFUL JOURNEy 53


The dominance of MNEs at the first-tier of the supply chain
is not unique to the Thai auto industry. The phenomenon of
foreign firms consolidating their position at the first tier of
the supply chain has become integral to the globalization
of auto industry.19 For example, by the late 1990s in Brazil
there was only one locally owned firm among the 13 largest
component producers.20 In the Republic of Korea, many
large auto part firms were taken over by Western first-
tier suppliers after the 1997-1998 financial crisis.21 Given
concerns about protecting proprietary assets in cutting edge
technology in a highly competitive market, wholly owned
affiliates have become the preferred mode of international
operation for MNE auto part producers.


The fact that only a few indigenous suppliers have been able
to maintain their OEM status suggests that the LCR regime
during the 1970s and 1980s failed to have a significant,
lasting and positive impact on local part suppliers. However,
the LCR regime and other protection measures helped local
suppliers gain technological capability. The relevant issue is
whether such protection measures can lay the foundation
for sustainable development of a local auto parts sector.
The Thai experience suggests that these measures were
insufficient to build up the technological capability of local
suppliers and allow them to benefit from the gains of
dynamic economies.


Evidence from firm level interviews suggests that the
success of the few local OEM producers has come not
from the protection provided by LCR measures, but from
their ability to forge links with the car assemblers whose
production strategy shifted in the late 1980s towards
exports. The expansion of production in these firms began
in earnest only from the mid-1990s when policy reforms, in
particular the removal of LCR, enabled them to forge links
with world class part makers.


At the initial stage of global integration, opportunities seem
limited for purely local firms to become OEM suppliers
on their own within MNE-dominated production networks
without forging links with MNE part suppliers. Their activities
will be heavily concentrated at the second and third tiers until
they gain technological expertise and establish themselves
as quality providers. The few local OEM suppliers are
currently concentrated in the production of auto-body
parts. Car assemblers normally design body-related parts
because they are directly related to the appearance of the
vehicle. Production of these parts does not require a high
level of technological capability.


However, there are indications that the local OEM suppliers
and some local firms involved at the second tiers have
begun to move up the technology ladder. For instance,
Thai company Aapico has emerged as one of the world’s
best suppliers of low-volume tooling. A recent study of
procurement practices found many cases of Japanese
automakers and first-tier firms expanding procurement of
high-tech parts from second-tier Thai firms.22


The number of local firms joining the automotive production
chain at the second and third tiers has significantly


increased over the past decade or so. They are involved
in the production of standard parts and components, as
well as intermediate inputs such as such as plastics, textile
products and leather products. Growth prospects in these
product lines seem promising because of the high growth of
vehicle production and the increased local content of locally
assembled vehicles. Evidence from interviews suggests that
knowledge and technology transfer from OEM firms and
final assemblers to lower tier suppliers have accelerated as
the auto industry becomes increasingly globally integrated.


what drove thailand’S
SucceSS?


There is no single explanation for the recent, rapid export-
oriented growth in the Thai automotive industry. It has
been underpinned by a combination of restructuring and
geographic change in the industry and pragmatic policy
that made Thailand attractive for international production.
The size of the domestic market, which enabled automakers
to gain economies of scale, also played an important role.


Global ShiftS in the induStry


Over the past two decades, there has been a massive
transformation in the structure, conduct and performance
of the global automotive industry, opening opportunities
for countries in the periphery to join the global production
network. Until the mid-1980s, automotive firms
predominantly engaged in multi-market operations by
setting up production bases in individual countries to serve
those markets.


Since then, the industry has become increasingly globally
integrated in the sense that manufacturing, sourcing
and marketing have become increasingly multinational.
Production standards have become increasingly universal,
accompanied by a shift in production processes from
generic to modular technology.


Consequently, parts and components production has grown
rapidly to cater for multiple assemblers. In this context,
intense competition among carmakers has transformed the
industry’s geographic spread beyond mature industrialized
countries. The search for low-cost production sites has led
to the establishment of production plants by automotive
MNEs in peripheral countries.


The global spread of the automotive industry has been aided
by a shift in global demand patterns. In recent years, the
markets in North America, Western Europe and Japan have
been rapidly approaching the saturation point. In contrast,
growth perspectives for vehicle sales are increasingly
promising in emerging economies. This shift in demand
patterns has led auto MNEs to set up new assembly
bases to serve regional markets. With this regional focus,
carmakers tend to consolidate their assembly facilities




CHAPTER III – THAILAND’S SUCCESSFUL JOURNEy54


within a region. They must decide which models to produce
at which locations, at what prices and quality standards,
and for which markets – regional or global?


favourable, Stable Policy
environment


Thailand benefited from the global spread of the auto
industry due to its market-oriented policies during the
import substitution era and its subsequent, well-timed policy
transition towards greater outward orientation.


During the import substitution era, Thai policy was similar
to that in other developing countries. However, Thai policy
remained relatively more liberal and stable than in Malaysia,
Indonesia, the Philippines and many other developing
countries. Thailand never had an explicit goal to promote a
national car, as in Malaysia or Indonesia. The then-president
of Toyota Motor Thailand stated in 1999: ‘Thailand is the
best candidate for hub status because it has no national
car policy and offers a level playing field for both local and
foreign firms.’23


At the same time, Thailand did not have an explicit target for
localizing parts and component production. Thai authorities
adopted a consensual approach to setting LCR targets in
consultation with automakers. The single case of an explicit
LCR programme, the One-Tonne Diesel Engine project, was
carefully designed in consultation with the private sector
stakeholders. At the same time, policy uncertainty from
frequent reversal of policy direction was much lower in
Thailand compared to Indonesia and the Philippines.


The Automobile Development Committee provided an
effective institutional setting for government officials to
formulate policies in consultation with firms and business
organizations. Interference of political leaders and top-level
policymakers was virtually absent in the decision-making
process.24 The fragmented nature of political parties and
frequent changes in governments prevented any political
group or private firm from influencing sector agencies on a
permanent basis. Moreover, the role of the state in designing
industrial policy was not orchestrated by a planning agency
with direct allocation control of economic resources. In this
political setting, a consensual approach to policymaking and
absence of abrupt policy shifts created stable expectations
and confidence in the business environment. Because
formulating policy was based on government-private sector
consensus, there were no abrupt policy shifts.


By design or by sheer luck, the Thai Government’s
liberalization of the automotive industry from the late 1980s
coincided with the structural shift in the industry towards
the production of a ‘global car’. Thailand benefited from
a first mover advantage in attracting global players to set
up production bases in the country. Abolishing LCR and
ownership restriction on local affiliates of foreign firms set the
stage for linking the domestic industry to global production
networks. Eliminating these restrictions prompted and
facilitated MNE automakers and part suppliers to set up


new affiliates and to bring more cutting edge technology to
the affiliates in Thailand.


An important aspect of the performance of the Thai auto
industry that requires clarification is the coexistence of high
tariff protection, which implies an anti-export bias, and rapid
export growth. Despite some recent reductions, tariffs on
completely built automotives remain much higher than tariffs
on other imports. Moreover, given the cascading nature
of the tariff structure, the rate of effective protection for
domestic automotive assembly is higher than the average
applied nominal rate.


Why has this anti-export bias not been a deterrent to
rapid export growth? A possible explanation is that export
expansion has been predominantly driven by MNEs that
set up production plants in Thailand to produce for the
global market, not just for the Thai market. The conventional
argument for removing anti-export bias as a precondition for
export expansion is based on the assumption that exporting
is an act of domestic firms. The marketing decisions of
these domestic firms are driven by the relative profitability
of exporting compared to selling in the domestic market.
Relative profitability in selling in the domestic market is not a
binding consideration for an MNE involved in manufacturing,
sourcing and marketing within a global production network.
At the same time, firms involved in export production in
Thailand have access to both imported and locally procured
intermediate inputs at world market prices.25


So far this case study has examined Thai trade and
investment policy relating to the automotive industry.
However, a sound trade and investment policy regime is a
necessary – but not a sufficient condition – for successful
global economic integration. Equally important is the
conduciveness of the overall economic environment for
doing business. International competitiveness requires
high-quality hard and soft infrastructure, especially for
successful participation in time-sensitive global production
and purchasing networks. Labour markets need to reflect
underlying supply and demand conditions, with wage
growth and differentials driven by productivity.


Prudent macroeconomic management is required to
provide a stable and predictable commercial policy
environment and to ensure that exchange rates do not
impair competitiveness. Above all, political stability and
policy certainty figure prominently among pre-requisites
for profitable long-term investment, particularly in the site
selection decision of MNEs.


In recent years there have been various attempts to assess
the comparative attractiveness of business environments
in individual countries on the basis of investor surveys or
other subjective assessments. Thailand scores consistently
high in the World Bank’s Doing Business 2009 survey, which
has the widest country coverage among the alternative
databases.26 Thailand ranks 13th of the 181 countries
covered in this survey. Among Asian countries, only
Singapore, Hong Kong SAR and Japan rank higher than
Thailand.




CHAPTER III – THAILAND’S SUCCESSFUL JOURNEy 55


Thailand’s macroeconomic policy has been largely
consistent with the country’s commitment to outward-
oriented development strategy. Thailand, along with its high-
performing counterparts in East Asia, has never experienced
episode of hyperinflation and massive exchange rate
misalignment as seen in most countries in Latin America
and Africa.


domeStic market Size matterS


For MNEs, the size of the domestic market is an important
consideration in the site selection process. Domestic market
size was more important when location decisions were
driven by import substitution considerations. However, even
in the modern era of globally integrated production networks,
domestic market size matters in achieving economies of
scale. The cost of domestically produced parts is also
inversely related to the size of the domestic market.


Thailand has the largest domestic market for automobiles in
the region (see tables 10 and 11). For the past two decades,
annual vehicle sales in Thailand have ranged from about
300,000 units to 500,000 units, accounting for over 40%
of the total sales in the ASEAN-4 countries, followed by
Indonesia (27%), Malaysia (22%) and the Philippines (10%).
A market that can absorb 40,000 to 50,000 units is generally
considered of sufficient size for achieving economies of
scale for a given car model.


The one-tonne pick-up truck, given its particular appeal in
Thailand for farmers and urban vendors, met this criterion
by the mid-1980s. Total domestic sales of pick-up trucks
were 85,000 in 1985 and almost 250,000 in 2008. This
vehicle model has been the prime mover of rapid expansion
of automotive exports from Thailand.27 Thailand is now the
world’s second largest producer – after the US – and the
largest exporter of one-tonne pick-up trucks.


concluSion
Over the past two decades, Thailand has emerged as a hub
of vehicle production for the regional and global markets.
Rapid expansion in auto industry has spawned a parts and
components supplier network in the country, resulting in an
impressive increase in local content in Thai-made cars. Thai
success in automotive production has been underpinned
by a favourable combination of four factors:


ƒ Structural changes in global auto industry that permitted
countries in the periphery to join production networks for
the global and regional markets;


ƒ Pragmatic, market-oriented policies that enabled the
domestic auto industry to evolve with trends in the wider
global economy;


ƒ The size of the Thai market that met the requirements of
domestic car assembly – in particular the one-truck pick-
up truck – to achieve economies of scale;


ƒ Extensive consultation with private sector stakeholders.


The policy instruments used by Thai authorities during the
import substitution era were basically the same as those
used by their counterparts in other developing countries:
tariff protection to entice MNEs to set up production plants
for the domestic market and LCR to force these plants
to forge backward linkages with local auto part makers.
However, Thai policymakers implemented these policies in
a market-oriented manner in consultation with automakers
and other private sector stakeholders.


This pragmatic approach was instrumental in winning
investor confidence and thus laying a solid foundation for
building a world-class production base. Unlike Malaysia
and Indonesia, Thailand never pursued a national car
policy; both foreign and local companies were treated on
an equal footing.


Thailand became a regional hub by the timely abolition
of LCR and ownership restrictions on affiliates of foreign
companies. Thailand was the first developing country
member to honour WTO commitments. These reforms,
undertaken when the auto industry was beginning to go
global, played a pivotal role for the domestic auto industry
to become a part of global production networks.


Tariff protection on auto imports remained high, but this did
not constrain auto exports. This is because the domestic
auto industry, which was dominated by foreign subsidiaries,
had become a global production network, no longer serving
only the domestic market. Thus, the size of the domestic
market, which enabled automakers to gain scale economies,
also played a role. Expansion of domestic sales, benefiting
from tariff protection, and expansion of export at a faster
rate driven by the competitiveness of domestic production
within the wider global production networks are not mutually
exclusive in a globalized auto industry.


Both car manufacturing and component production are
dominated by foreign firms, with most purely local firms
involved in the production network as second-tier and
third-tier suppliers of simple, diffused technology parts
and components. However, this has not made a case
for government intervention to promote local interest.
Increased foreign involvement in both car assembly and
parts production has been a universal phenomenon driven
by a structural shift in the auto industry from the traditional
multi-market mode of production to a globally integrated
system of production.


In the new era of the ‘global car’, strategic alliances forged
between the key players in the industry and firms of different
national origin have become the norm of cross-border
operation. This does not imply that Thai companies lack the
ability to move up the production ladder as they acquired
expertise and technological capabilities.




CHAPTER III – THAILAND’S SUCCESSFUL JOURNEy56


Table 10: Domestic automobile sales in Indonesia, Malaysia, the Philippines and Thailand, 1980–2005 (’000 units)


Indonesia Malaysia Philippines Thailand Total


1980 172 101 56 89 418


1985 144 107 7 86 344


1990 275 186 58 304 823


1991 261 200 48 268 778


1992 170 145 61 363 738


1993 211 155 84 456 905


1994 321 200 103 486 1 111


1995 379 285 128 572 1 364


1996 332 365 162 589 1 448


1997 387 405 144 364 1 299


1998 58 164 80 144 446


1999 94 288 74 218 674


2000 105 200 120 262 687


2001 180 240 140 298 858


2002 202 300 160 340 1 002


2003 300 340 185 450 1 275


2004 400 503 251 691 1 842


2005 424 511 246 739 1 920


Source: Data for Thailand are from Thailand’s Automotive Industry Directory 2003 to 2004, and data for other ASEAN countries from Guilheux
and Lecler (2000: p. 226) and Standard and Poor (S&P) (2000). The forecasted data are from Fourin (1998).


Notes: Total is the sum of vehicle sales of Indonesia, Malaysia, the Philippines, and Thailand. Data for 2000–2005 are the forecast except for
Thailand in 2000 to 2001.


Table 11: Domestic vehicle sales in Thailand classified by vehicle type, 1990-2008 (’000 units)


Total
Passenger


cars


Commercial vehicles


Total
Vans and


buses
1 tonne
pick-ups


2-4 tonne
trucks


Trucks over
4 tonnes


Less than
one tonne


Other


1990 304 66 238 7 168 16 32 12 4


1991 269 67 202 8 155 10 16 10 3


1992 363 121 242 10 183 12 18 14 4


1993 456 174 282 12 224 13 16 14 4


1994 486 156 330 13 258 14 22 20 3


1995 572 163 408 12 324 16 32 16 5


1996 589 173 416 13 328 17 32 15 13


1997 363 132 231 8 188 9 11 6 8


1998 144 46 98 3 81 3 4 3 4


1999 218 67 151 4 130 4 3 3 7


2000 262 83 179 6 152 5 5 4 8


2001 297 105 192 7 169 4 4 3 6


2002 409 126 283 8 241 5 6 2 22


2003 533 179 354 8 309 7 11 1 16


2004 553 184 369 9 326 8 13 1 10


2005 703 188 515 13 470 12 14 – 5


2006 682 195 487 13 329 10 13 1 –


2007 631 183 448 18 286 10 12 2 –


2008 614 239 375 16 246 7 10 7 –


Source: Data downloading from Thailand Automobile Institute website at www.thaiauto.or.th/index_eng.asp.


Note: Dashes indicate information that is not available.




CHAPTER III – THAILAND’S SUCCESSFUL JOURNEy 57


annex i: chartinG trade and inveStment PolicieS 1960-2008


1961 1960 Industrial Investment Promotion Act provides incentives for the local assembly of automobiles.


1962 1962 Industrial Investment Promotion Act announced 50% reduction in tariffs on CKD kits: new rates, passenger cars
30%; pick-ups 20%; and trucks 10%.


1969 Ministry of Industry sets up Automotive Development Committee (ADC).


20% increase in tariffs on CBU vehicles: new rates, passenger cars 50%; pick-ups 40%; and trucks 30%.


1971 MOI restricts the number of locally assembled passenger car, pick-ups and trucks models.


Announces LCR measures to become effective in 1974: domestically assembled vehicles to use locally produced
parts at least 25% of the total value of the vehicle.


1976 An import duty rebate scheme for export producers comes into operation.


1978 Ban of CBU imports and increase of import duty on CKD kits to 80%.


Suspends approval of new assembly plants to reduce over capacity.


Tariffs of CBU passenger cars and CKD passenger cars increased to 150% and 80% respectively.


1982 LCR requirement for all vehicles set at 45%.


1983
The duty rebate scheme (introduced in 1977) supplemented by outright import duty exemption for intermediate inputs
imported by export-oriented firms (firms exporting more than 30% of total output) approved by the BOI.


1983 Intermediate inputs imported by export-oriented firms (firms exporting more than 30% of production) approved by the
BOI exempted from import duties.


1985 Mandatory local-content list imposed.


Ban on imported CBU vehicles with engine capacity over 2,300 cc. lifted.


1986 LCR for passenger cars increased to 54%.


List for compulsory and non-compulsory parts introduced.


1989 Ceiling on production capacity of existing assembly plans lifted.


1990 Restrictions on domestic production of series and models abolished.


Quantitative import restriction (including the ban on imports of CBUs under 2.3 litres) on passenger cars replaced with
tariff.


1991 Tariffs on all types of CBUs and CKD kits reduced:


- CBUs over 2.3 litres from 300% to 100%.


- CBUs under 2.3 litres from 180% to 60%.


- CKDs for cars, pick-ups and vans from112% to 20%.


Use of locally produced diesel engines for 1-tonne pick-up trucks required.


1992 Pick-up trucks exempted from excise tax.


1993 Ban on new assembly plants lifted.


1994 Supply of parts and components by domestic firms to automotive assembly for export exempted from all domestic
taxes as part of government policy to facilitate development of backward linkages of auto industry.


1995 CKD tariffs reduced from 20% to 2%.


1997 Local ownership requirement on foreign-invested projects abolished (announced 1993; implemented 1997).


Implication/streamlining of customs procedures for facilitating importation of intermediate inputs used in production
for export commenced.


1999 Tariffs on CKD vehicles raised from 20% to 30%-35% to cushion against the potential adverse impact of impending
LCR abolition.


2000 LCR requirement abolished.


The WTO Agreement on Customs Valuation comes into operation.


2003 Tariff preferences under the ASEAN Free Trade Agreement (AFTA) come into full effect: import duties applicable to
intra-ASEAN trade down to 0-5%.


2004 - 2008 No significant changes.


Source: Compiled from various government policy reports and press releases.




CHAPTER III – THAILAND’S SUCCESSFUL JOURNEy58


annex ii: the evolution of the denSo affiliate in
thailand, 1973-2005


Siam Kyosan DENSO



Fuel filter




DENSO (Thailand) (Wellgrow Plant)



Condenser, Radiator, Inter Cooler, Oil
cooler, Hose, Tube, Cooling Fan with
Shroud, Reserve Tank


Shroud, Reserve Tank


DENSO Training Academy
(Thailand) •




Training Center of Thai
DENSO Group


Change company name
from Nippondenso
Thailand to DENSO
(Thailand)




Nippondenso Thailand
(Samrong Plant)
• Cooling unit


1973 1996


2003


1987 1995


2004 2005


DENSO Tool & Die
(Thailand)
• Mould


Nippondenso Thailand
(Bangpakong Plant)






Alternator, Starter, Wiper
Motor, Glow Plug,
Magneto, Generator Assy,
Windshield


Fan, Washer Assy,
Windshield Siam DENSO Manufacturing •




Injector, Supply Pump,
Rail, SIFS




Toyota Boshoku Filtration System
(Thailand)




Oil Pressure Valve, Oil filter




Anden (Thailand)




Relay, Flasher




DENSO International (Thailand)







To integrate and
support business function
of Thai DENSO Group


function of Thai DENSO
Group




2002


Source: Compiled from Company Profile.




CHAPTER III – THAILAND’S SUCCESSFUL JOURNEy 59


endnoteS


1. Thailand: Country Profile 2008, p. 21, Economist Intelligence Unit,
London 2008.


2. The term ‘automotive industry’ refers to the assembly and production
of parts and components of passenger cars and commercial vehicles.
Motorcycles are excluded from the product coverage.


3. The first survey was carried out in 2006 by A. Kohpaiboon as part of his
doctoral research. The second survey was carried out by a research team
he led as part of an International Labour Organization-funded research
project in 2010.


4. A completely knocked-down product or machine is in several pieces
and needs to be put together before it can be used.


5. Business ventures set up without BOI approval were not eligible for
investment incentives or to own land. For these reasons almost all major
multinational enterprise (MNE) affiliates operating in the country have been
set up under BOI approval.


6. As part of the new policy, the Government rationalized the output mix
of local production by setting limits by models and engine sizes as well
as minimum capacity limits on individual assembly plants. However, this
rationalization policy lasted only six months.


7. Doner, Richard. F., Driving a bargain: automobile industrialization and
Japanese firms in Southeast Asia, Berkeley, University of California Press,
1991.


8. Data on Thai auto industry reported in this paper, unless otherwise
stated, come from Thailand Automotive Institute website: http://www.
thaiauto.or.th/index_eng.asp.


9. Trade Policy Review: Thailand, pp. 115-116, World Trade Organization,
2007.


10. In 1998, this programme was generalized to cover the entire auto part
trade under the new title – ASEAN Investment Complementary Operation
(AICO) programme.


11. The ERP measures the proportionate increase in per unit value added
of a given industry/sector due to the complete system of tariffs. More
specifically, it takes into account the protection on output and the cost-
raising effects of protection on inputs.


12. Jongwanich, J., Kohpaiboon, A., Determinants of Protection in Thai
Manufacturing, Economic Papers, 29(3), pp. 276-294, 2007.


13. Kohpaiboon, A., Multinational enterprises and industrial transformation:
evidence from Thailand, p. 195, Edward Elgar, Cheltenham, 2006.


14. Second-tier and third-tier suppliers produce parts and components for
first-tier suppliers.


15. Athukorala, Prema-chandra, ‘Trade Policy in Malaysia: liberalization
process, structure of protection, and reform agenda’, ASEAN Economic
Bulletin, 22(1), pp. 19-34, 2005.


16. Kohpaiboon, A., Multinational Enterprises and Industrial Transformation:
evidence from Thailand, p. 174, Cheltenham, Edward Elgar, 2006.


17. Ibid.


18. Data for Chrysler are not available. They are presumably included in
the figures for Mitsubishi, Chrysler’s global partner.


19. Klier, T., J. Rubenstein, Who really made your car? Restructuring
and Geographic Change in the Auto Industry, W.E. Upjohn Institute for
Employment Research, Michigan, 2008.


20. Humphrey, J., A., Oeter, ‘Motor Industry Policies in Emerging Markets:
globalisation and the promotion of domestic industry.’ Humphrey, J.,
Lecler, y., Salerno, M.S., (eds.), Global Strategies and Local Realities: the
auto industry in emerging markets, St. Martin’s Press, New york, 2000.


21. Doner, Richard F., Greg G., Noble, Ravenhill, John, ‘Production
networks in East Asia’s Automotive Part Industry’, Shahid, I., yusuf,
M., Altaf, A., Nabeshima, K., (eds.), Global Production Networks and
Technological Change in East Asia, Oxford University Press, New york,
2004.


22. ‘Global sourcing for auto parts with high function in automobile
industry,’ Tyusyokouko Report, No. 2007-4, Japan Finance Corporation,
Tokyo, 2007.


23. Bangkok Post Economic Review, p. 5, 1999.


24. Thailand became a constitutional monarchy in 1932. Modern political
institutions remain weak and unstable. Political parties are impermanent
and subject to constant fragmentation. Few parties operate nationwide
and have grassroots bases. They are not based on consistent political
philosophy or policy agenda. As a result, the Thai bureaucracy plays an
important role in policymaking. Industrial policymaking is spread across
a wide array of agencies. In the absence of direct political influence
and associated lobby group pressure, industry-specific policymaking is
normally undertaken by middle and senior officials in consultation with
firms and trade associations under ad hoc multiple office committees.


25. In 1983, the import duty drawback scheme, in operation since
1975, was supplemented with a complete direct duty exception for
export-oriented firms with export-sale ratios of more than 30%. Customs
procedures for these imports have been greatly simplified from 1997. In
1994, parts and components supplied by domestic firms to production of
automobiles for export markets were exempted from all domestic taxes.


26. Data are given only for the latest year for which the survey results are
available. There has not been significant change in the ranking of individual
Asian countries since the commencement of survey in 2004.


27. Doner, Richard F., The politics of uneven development: Thailand’s
economic growth in comparative perspective, Cambridge, Cambridge
University Press, 2009.




©
iS


to
ck


ph
ot


o




chaPter iv


growing with global
production sharing in
malaysia
the penang export hub


case study executive summary �������������������������������������������������������������������������������������������������������������������� 62


the rise of global production �������������������������������������������������������������������������������������������������������������������� 62


penang’s origins as an export hub ������������������������������������������������������������������������������������������������������������� 63


policy reforms revitalize the economy ������������������������������������������������������������������������������������������������� 63


evolution of the export hub ������������������������������������������������������������������������������������������������������������������������� 68


penang weathers global changes ������������������������������������������������������������������������������������������������������������� 72


investment trends and company profiles ���������������������������������������������������������������������������������������������� 74


export performance ������������������������������������������������������������������������������������������������������������������������������������������ 78


a vibrant industrial centre with economy-wide impact ������������������������������������������������������������������ 80


conclusion ������������������������������������������������������������������������������������������������������������������������������������������������������������ 85


annex: sources and methodology ������������������������������������������������������������������������������������������������������������ 87




CHAPTER IV – GROWING WITH GLOBAL PRODUCTION SHARING IN MALAySIA62


GrowinG with Global
Production SharinG in
malaySia
the PenanG exPort hub


caSe Study executive
Summary


Global production sharing – the division of production
processes into geographically separated stages – has been
an increasingly important facet of economic globalization
over the past few decades.1 This study seeks to broaden
understanding of global production sharing and explore
policy options for developing countries to engage effectively
in production networks as part of a national development
policy.


The export production hub in the State of Penang, Malaysia,
with more than four decades as a major hub in global
production networks, provides a valuable laboratory to
study government policies and global sourcing strategies
of MNEs in determining developmental gains from global
production sharing.


This study focuses on the role of public-private partnerships
in forging links between MNEs and local firms to achieve
self-sustained growth through enhanced local capabilities.
It probes the role of public-private partnerships in Penang in
the context of rapid changes in global production networks
and increased competition faced by existing production
locations as production networks expand to new locations
with greater relative cost advantages.


The policy lessons from the Penang experience are relevant
for other developing countries. Countries that seek to
use technology to move up the value chain and increase
national income will also find insights from this case study.


The study first provides an overview of initial economic
conditions in Penang to set the stage for the ensuing analysis.
Next it discusses the policy context, key elements of policy
reforms and the institutional setting in which export-oriented
development strategy was implemented. The Penang state
government made innovative efforts to gain policy space
and financial autonomy within the Malaysian federal system.
Next, evolution of the export hub is discussed. Investment


patterns and export performance are then examined,
followed by a discussion on the economy-wide implications
of export-led growth. Key findings and policy lessons are
presented in the conclusion.


the riSe of Global
Production


With a modest start in the electronics and clothing industries,
multinational production networks have evolved and spread
into many industries such as sports footwear, automobiles,
televisions and radio receivers, sewing machines, office
equipment, power and machine tools, cameras and
watches, and printing and publishing. At the formative
stage, production sharing involved assembly of small
fragments of the production process in a low-cost country
and re-importing the assembled parts and components to
be incorporated in the final product.


Subsequently, production networks began to encompass
many countries engaged in the assembly process at different
stages, resulting in multiple border crossings by product
fragments before they were incorporated in the final product.
As international networks of parts and component supply
have become firmly established, producers in advanced
countries have begun to move the final assembly of an
increasing range of consumer durables to overseas locations
to be closer to their final users and in some instances to take
advantage of cheap labour. These consumer goods include
computers, cameras, televisions and automobiles. There
has been a steady rise in trade in parts and components
and assembled final products – ‘network trade’ – in global
production networks. In 2007, network trade accounted for
51% of total world manufacturing exports, with 41% of these
exports originating in developing countries.2


Global production sharing in consumer goods such as
garments and footwear normally takes place through arm’s
length relationships, with international buyers playing a
key role in linking producers and sellers in developed




CHAPTER IV – GROWING WITH GLOBAL PRODUCTION SHARING IN MALAySIA 63


countries. However, the bulk of global production sharing
in electronics and other high-tech industries still takes place
under the aegis of MNEs. This is because the production
of final goods requires highly customized and specialized
parts and components whose quality cannot be verified or
assured by a third party. In addition, it is not possible to write
a contract between the final producer and input supplier
that would adequately specify product quality.


This is particularly the case when establishing production
units in countries that are newcomers to export-oriented
industrialization. As the production unit becomes well-
established in the country and it forges business links
with private and public-sector agents, arm’s length
subcontracting arrangements with local firms can
develop, leading to firm-level upgrading of technology and
management capabilities.


Global production sharing creates opportunities for
developing countries to participate in a finer international
division of labour and specialize in production processes
in vertically integrated global industries depending on
relative cost advantage. Because parts and components,
capital and production technology are mobile within global
production networks, relative unit labour cost determines
a country’s success from engaging in global production
sharing. However, in addition to labour abundance, several
factors impacting the business climate are important in
attracting MNEs to set up assembly plants and deepening
their engagement with local enterprises.


PenanG’S oriGinS aS an
exPort hub


Penang, a state located on the northwest coast of Malaysian
Peninsula, is divided into two parts: Penang Island (Pulau
Pinang, in Malay), an island located in the Strait of Malacca;
and Seberang Perai (formerly Province Wellesley). Penang
is the second smallest among the 13 states in area, but
the eighth most populous at 1.52 million, according to the
2010 census. In terms of natural resources relative to its
population, Penang is the least favourably endowed of all
the states of Malaysia.


Penang’s modern history began with the arrival in August
1786 of Captain Francis Light to set up an East Indian
Company trading post. Under British rule, Penang became
the first port of discharge for ships sailing from Europe and
India to the Strait of Malacca, and a trade centre for the
northern Malay Peninsula, Sumatra, Burma, South Thailand
and the Dutch East Indies (Indonesia) after the opening of
the Suez Canal in 1869. British protection drew merchants
and migrants from neighbouring countries, with Chinese
immigrants soon becoming the largest community. From the
early 20th century, Penang was a regional centre of Islamic,
Chinese and English education.3


At independence in 1957, Penang’s economic status
was healthier than other Malay states and comparable to
Singapore and Hong Kong SAR. Trade-related infrastructure,
including its airport, container port and sea-cargo terminal,
was the best in Malaysia. There were well-developed
banking, insurance and freight forwarding services, water
supply, electric power, telecommunication services and
transport facilities. Penang had a relatively well-developed
network of small enterprises evolved around warehouse
activities. People in Penang were relatively well educated;
most of them had at least nine years of schooling, with a
substantial number proficient in English.4


When Malaysia attained independence in 1957, attention
focused on the new national capital, Kuala Lumpur, which
became the country’s main port. Penang’s trade from
Thailand, Burma and Indonesia dwindled as each country
developed its own ports. Indonesia’s confrontation with
Malaysia from 1963-1965 cut off lucrative trade. The final
blow came with the revocation of its free port status in 1967.
Consequently throughout the 1950s and 1960s, Penang’s
trade-dependent economy slid while the population grew
rapidly due to the post-war baby boom.


In the early 1960s, the Alliance Party state government
attempted to avert the collapse of Penang’s economy
through a programme of import substitution industrialization.
An industrial state was set up in Perai in 1964 to produce
goods for the domestic market, but most of these industries
failed within a few years. By the end of 1960s, Penang’s
per capita income was 12% lower than the national
average. The unemployment rate reached 9% – 16% when
underemployment is considered – and the population’s
general mood was rebellious. Penang was plagued by
frequent strikes, social unrest and racial tension.5


In this volatile climate, revitalizing the economy was
the dominant issue of the May 1969 general elections.
The newly formed Gerakan Rakyat Malaysia (Malaysian
People’s Movement Party), led by Dr. Lim Chong Eu, won by
promising to revitalize the economy through export-oriented
industrialization. This new political leadership ushered in an
era of policy reforms that set the stage for the emergence of
Penang as an export hub.


Policy reformS revitalize
the economy


In 1969, the central government retained Robert R. Nathan
Associates, a US-based consultancy firm, to prepare a
master plan for Penang’s economy. Analyzing Penang’s
development potential in light of the experiences of Japan,
Chinese Taipei, Hong Kong SAR and the Republic of
Korea, the Nathan Report – Penang Master Plan Study –
called for a shift in economic structure through export-led
growth strategy. After taking into account Penang’s limited
agricultural potential and lack of mineral resources, the
plan called for ‘plugging in’ the economy into the global




CHAPTER IV – GROWING WITH GLOBAL PRODUCTION SHARING IN MALAySIA64


economy. The plan was based on using human resources
as the only viable strategy to avoid economic stagnation,
chronic unemployment and outmigration of capable young
people.


The Nathan Report proposed a shift of emphasis from
Seberang Perai (the capital of Province Wellesley) to Bayan
Lepas, for its better transport facilities, good logistics and
access to a large labour pool. The report envisioned an
international division of labour: the electronics industries
in the West were looking for cheap labour doing repetitive
work. The report also saw potential for tourism and fishing,
but emphasized export-led industrialization as the potential
prime mover.


Dr. Lim embraced the Nathan Report as the blueprint for policy
reforms turning ‘the socially disturbing high unemployment
rate in Penang … into a socio-economic advantage through
the promotion of labour-intensive industries’.6 He selected
the electronics industry as the priority, and free trade zones
(FTZs) as the vehicle to attracting electronics multinationals
to set up production facilities. The choice of electronics
as the target industry was based on two considerations.
First, its labour-intensive nature and second, unlike heavier
polluting industries, it was compatible with Penang’s role as
a centre of tourism.


Penang state government’s decision to embark on export-
led industrialization was followed by a major policy shift
at the federal level. In May 1969, Malaysia experienced its
first major ethnic conflict. Following this traumatic event the
Malaysian Government formulated a sweeping national
development programme based on affirmative action, the
New Economic Policy (NEP).7 The overriding objective
of NEP launched in 1971 was to maintain national unity
through poverty eradication among the entire population
and restructuring Malaysian society ‘so that the identification
of race with economic function and geographical location is
reduced and eventually eliminated.’8


Development strategy was reformulated with an emphasis
on export-oriented industrialization. Long-term targets were
established for Malay equity ownership in limited companies
and the proportion of Malays employed in manufacturing
and occupying managerial positions.


national – local coordination


The choice of export-oriented growth as a key element
of the new development strategy at the national level
greatly facilitated the Penang government’s export-led
industrialization move by avoiding possible policy conflict.
However, the NEP’s ethnicity-centred development policy
posed a major challenge for the Chinese-dominated
Penang government.


Malaysia has a centralized form of federal administration,9
though state governments have limited revenue-raising
capabilities. The federal government monopolized taxation;


state governments can only raise revenues through land
acquisition and management and setting utility rates. The
states have little influence on offering tax incentives and
other concessions to foreign investors. The states, apart
from allocating land, providing infrastructure, and some
freedom in respect of collecting local taxes, have to work
within the general national guidelines while devising their
own projects and programmes. Moreover, there are no
clear-cut rules or procedures for budgetary allocation
among the states. Conflicts surface, especially when an
opposition party controls a state government.10


Dr. Lim obtained freedom of action for his Penang
development strategy through a collaborative approach. He
maintained close links with Tun Abdul Razak, then deputy
Prime Minister and Director of the National Operations
Council (NOC),11 who later became the Prime Minister.
Dr. Lim committed full support to Razak in restoring peace
and order in Penang during the turbulent period following
the ethnic riots in Kuala Lumpur. This cooperation led to the
joining of the Gerakan party with the federal ruling party,
Alliance, to form a coalition called Barison Nasional. This
well-calculated move helped to avert conflict with the federal
government in implementation of policy reforms in Penang.


The reforms began with restructuring government machinery.
A new statutory body, the Penang Development Corporation
(PDC), was formed as the principal development agency.
The legal status of PDC as a statutory body allowed it
flexibility in fulfilling national objectives in areas where
government departments faced constraints, and provided
an institutional mechanism for coordinating activities of
the municipal administration and the state government.
Dr. Lim filled the key positions of PDC with senior personnel
of the federal administration who had been involved in the
Penang master plan study. Of particular importance was
the appointment of Chet Singh, an ethnic Indian economist
from the Malaysian Civil Service and the State Financial
Officer, as the first general manager of PDC. Singh played a
pivotal role as Lim’s right-hand man during the ensuing two
decades in transforming Penang into an export-production
hub with MNE participation.


Dr. Lim chaired the State Planning and Development
Committee (SPDC), the apex policymaking body of PDC,
during his more than 20-year tenure as the Chief Minister
(May 1968 – October 1990). The SPDC made all decisions
relating to permission for land acquisition and development.
All proposals were reviewed within three months of receipt,
correspondence was replied to within seven working
days, and responses to complaints were given within 21
working days. The PDC operated with the work ethic and
management style of a private-sector company, with reward
for employees based on productivity.12


In 1974, the two local authorities on Penang Island were
abolished and the island was placed under a single municipal
administration, the Board of Management of Penang Island.
On the mainland, the three district councils were merged
to form a single local authority, the Board of Management




CHAPTER IV – GROWING WITH GLOBAL PRODUCTION SHARING IN MALAySIA 65


of Seberang Perai. In 1976, the two local authorities
were changed to Penang Island Municipal Council and
Seberang Perai Municipal Council. PDC assumed the role
of coordinating activities of state government and the city
council, addressing the various flows and gaps within the
two levels of governance. Municipal administration reforms
facilitated PDC’s task of coordinating the works of the
various agencies involved in approvals for new businesses.


PDC started operations with an initial grant of Malaysian
ringgit (RM) 5 million (US$ 1.6 million) from the state
government. Given Malaysia’s high degree of fiscal
management centralization, PDC programmes had to be
implemented under severe resource constraints. In the
formative years, PDC was granted autonomy to evolve
a budgetary system to finance its programmes and
activities from internally generated funds supplemented
by loans from private institutions. An innovative feature
of the PDC budgetary system was a land bank formed
through acquisitions and strategic purchases, which acted
as a main source of revenue and facilitated infrastructure
development.


Financial autonomy gained through this strategic move was
vital for PDC’s success because other Malaysian states
soon followed Penang’s example of creating their own
development corporations, creating intense competition
for federal funding.13 With a large number of development
corporations and other government-linked companies
emerging, the federal government in 1974 established a
Ministry of Public Enterprises to coordinate, monitor and
evaluate the economic development corporations (EDCs)
in the 13 states and other government-linked companies.14
In 1980, the Federal (State Legislation) Competency Act
was amended to give the Ministry of Public Enterprises and
the Ministry of Finance more control over the operation of
statutory bodies.


An important feature of the PDC planning process under Lim
Chong Eu’s leadership was brainstorming sessions where
officers from various departments and statutory institutions
and the Chief Minister met in an informal environment.
These ‘jam-sessions’ proved to be a very effective means of
exchanging ideas and views.15


The PDC tactfully handled the NEP employment quotas by
permitting firms to recruit workers of their own choice based
on response to job advertisements – that is, by requiring
firms to recruit solely on the basis of advertisements rather
than trying to fill the quotas. The PDC enjoyed considerable
autonomy because Dr. Lim effectively used his political
connections to cushion PDC management against
influences from the federal level.


free trade zoneS, induStrial StateS
and infraStructure develoPment


Based on the Nathan Report recommendations, the
Penang state government pioneered the establishment of


FTZs in Malaysia. Through close consultation with relevant
federal agencies, in particular, the Economic Planning Unit
operating under the National Consultative Council, Penang
persuaded the federal government to promulgate the Free
Trade Zone Act in 1971. The Royal Customs and Excise
Department opposed FTZs on the grounds that they would
provide Penang with a back door to regaining its free port
status. However, the state government was able to jump this
hurdle thanks to the intervention by then Prime Minister Tun
Razak.16


The Bayan Lepas FTZ opened in August 1972. It aimed
to attract clean industries that required the movement of
materials and products by air transport such as electronics,
medical and other precision and machining industries.17
A second FTZ opened eight years later in Seberang Perai
near the shipping port to serve firms producing bulk items –
high weight-to-value products such as household electrical
appliances that depend on the shipping port and railways
for the movement of material and products. Subsequently,
the original Bayan Lepas FTZ was extended. Near the
FTZs, five industrial estates were set up for supportive and
ancillary industries related to FTZ firms, resource-based
industries and import-substitution manufacturing.


PDC used FTZs and industrial estates for focused infrastructure
development for successful global integration of the Penang
economy. PDC also created housing and new townships to
bring growth to the rural and least developed areas. Two new
townships, adjacent to the two FTZs, helped redress social and
economic imbalances between rural and urban populations.
In the new townships, surpluses from medium-cost housing
units were used to subsidize low-cost units. To link the two
new townships, the Penang Bridge was opened in 1985 with
the support of the federal government. PDC subsequently
embarked on a major urban development programme to meet
the growing demand for civic, administrative and community
amenities in the George Town city centre.


Land is a scarce resource in Penang. In its development
planning, PDC created a land bank through market acquisition
of paddy fields and reclamation. The land bank applied the
rule that for every acre of industrial land, there should be four
acres for development of housing, recreation, civic and social
amenities and other related economic activities. Given land
scarcity in Penang, the importance of land reclamation from
the sea was recognized as far back as early 1970s as the
most economical way of obtaining land for development. The
possible total area of reclamation from the sea was estimated
at the time to be about 3,800 hectares.18


inveStment Promotion


From its inception, PDC undertook promotion missions to
various countries. The investment promotion campaign was
designed with the help of Andy Ross, who had worked closely
with Singapore electronics firms. Most of these missions,
in particular those to California’s Silicon Valley, Germany
and Japan, were led by the Chief Minister. In its investment




CHAPTER IV – GROWING WITH GLOBAL PRODUCTION SHARING IN MALAySIA66


promotion campaigns, PDC successfully delivered the
message that Penang people’s skills and adaptability could
effectively complement the needs of high-tech industries.19


When investors arrived in Penang, PDC provided an efficient
and speedy one-stop service of approving and facilitating
investment. In addition, PDC understood the importance of
addressing the needs of investors already located in Penang:
‘The after sales service was just as, if not more, important than
the initial promotional work.’20 A delegation led by the PDC
Chairman often called upon chief executives of companies
that had invested in Penang to maintain close relationships
and obtain inputs to develop and update the investment
promotion campaign.


PDC avoided organizing large investment seminars or
conferences. Rather it conducted meetings with individual
companies so that full attention could be paid to their specific
needs. Over the years, PDC’s approach to investment
promotion was shaped by interactions and close relations with
the MNE affiliates in Penang.


forGinG mne-Sme linkS


Forging links between branch plants of MNEs in Penang
and local investors has been a key PDC priority.21 Based
on his close ties to the local business community, the Chief
Minister encouraged MNE affiliates to procure components
locally and foster subcontracting relationships with local
firms. Promoting links between SMEs and MNE affiliates
operating in Penang has been a priority of the Penang
Skills Development Centre (PSDC), an innovative business-
university-government training centre (see box 7). PDC


also encourages and provides institutional support to MNE
affiliates to initiate vendor development programmes to
strengthen backward input linkages with local suppliers.


At the formative stage, local firms faced two constraints in
venturing into subcontracting with MNEs. First, they had
to pay duties on imported inputs, whereas foreign firms
located in FTZs were exempted from those duties. Second,
being new to the industry, they were at a disadvantage
compared to foreign investors. In 1986, the incentive
package offered to foreign firms (including licensed
manufacturing warehouse status) was also offered to local
firms. In addition, at the request of the state government,
the Malaysian Industrial Development Authority (MIDA, the
federal investment approval body) imposed a minimum
capital requirement of RM 2.5 million for foreign machine
tool firms seeking approval to set up operations in Malaysia,
in order to support smaller local machine tool firms.22


vocational traininG ProGrammeS


In 1970, PDC established an Industrial Training Institute
with West German assistance to offer occupational training
in areas such as auto mechanics and welding. PDC, in
collaboration with the City Council of Georgetown, launched
a ‘job-cum-training scheme’ under which unemployed
school leavers were employed as half-time workers, with
the rest of the work day dedicated to technical training
in basic electronics and electrical component assembly.
These trainees were the first recruits of the new electronics
factories in the early 1970s. Under this training programme,
MNEs could install their equipment at the centre and train
their workers there. This helped reduce start-up time for new


Box 6: The FTZ incentive package


The Free Trade Zone Act of 1971 defines the zones to be
outside of the Federation of Malaya for the purpose of custom
duties and charges. All imported raw materials, components
and capital equipment directly related to production may enter
the zones without payment of customs duties or other taxes.
Goods manufactured in and exported from a FTZ are exempt
from sales tax and excise tax. Goods may be moved from one
FTZ to another without payment of duty or other taxes.


Because goods purchased by FTZ firms from within Malaysia
are treated as exports from Malaysia, the manufacturers of such
goods are eligible to claim drawback of duties on the imported
raw materials and components used in their production. The
domestic seller is responsible for payment of applicable export
duties and obtaining necessary export licenses. These goods
are not subject to excise taxes. FTZ firms are also exempt from
the payment of sales tax, excise duty and service tax.


Sales on the domestic Malaysian market of FTZ firms’ products
require prior government approval. Such sales are handled on
a case-by-case basis and limited to 20% of a firm’s annual


gross output. These sales are treated as imports into Malaysia
and import duties, and other taxes normally applicable to
imports of these goods, must be paid.


Real estate in FTZs is leased to zone firms at below market
lease rates. This was the most significant subsidy in providing
infrastructure to FTZ firms. At the initial stage of operation of
Bayan Lepas FTZ some firms operated in factory buildings
built and owned by the PDC. These buildings were rented at or
below commercial rental rates.


There are three major mutually exclusive systems of tax
relief for export-oriented firms in Malaysia: pioneer status,
labour utilization relief, and investment tax credit. The first two
entail complete exemption of company income tax for the
specific period and the third involves an exception that may
be complete or only partial. In addition, export-oriented firms
are also eligible to deduct export promotion expenditure in
calculating the taxable income. These tax incentives are not
unique to the FTZ firms, but they are an important component
of the FTZ incentive package.




CHAPTER IV – GROWING WITH GLOBAL PRODUCTION SHARING IN MALAySIA 67


Box 7: The Penang Skill Development Centre – excellence in training to supply multinationals


The Penang Skill Development Centre (PSDC), established
in 1989, has attracted worldwide attention as an example
of successful public-private partnership in human capital
development. PSDC officials have travelled to many
developing countries to provide expertise on how to
establish similar organizations.


In 1987, at an American Business Council Seminar, D.J. Hill,
President of the Free Trade Zone Enterprise Association in
Penang and CEO of National Semiconductor Electronics,
observed that the progress of the electronics industry in
Malaysia was constrained by a shortage of adequately
trained technicians and asked the Penang state government
to address the issue. Chet Singh, General Manager of
PDC, promised to look into the matter. One month later
he met with the CEOs of the three largest MNE affiliates
in Penang – Motorola, Intel and Hewlett-Packard (HP) – to
promote the idea of pooling training resources in a common
training facility. The proposal was for a tripartite training
institution, the Penang Skill Development Centre, bringing
together industry, academia (Universiti Sains Malaysia) and
government.


Following this meeting, a steering committee was formed
with representatives from the Penang state government,
Motorola, HP and Intel, under the chairmanship of
Stephen Cooper, CEO of HP, to identify the organization’s
objectives and strategies. The MNE managers were
generally sympathetic to the idea, but expressed two main
concerns. First, there was fear about employee poaching
by competing firms and security issues emanating from
outsiders (including government officials) having access
to the facility. Second, according to a report by the PDC,*
MNEs were concerned that ‘collaborative efforts between
companies and governments have long history of lofty
visions and flashy openings, but only to wither away after
a few years’.


It was decided to form a neutral training facility run as a
collaborative industry effort, with the state government acting
only as a facilitator. PDC agreed to be an ex officio member
of the management council to avoid diluting industry
leadership. The MNEs agreed to provide trainers, money
and material for a year with further support depending on
a performance assessment. The state government agreed
to provide an annual grant of RM 60,000 to cover the
initial expenses and lease premises to the centre for one
ringgit a year. After a successful operation in the first year,
the MNEs decided to contribute resources on a continual
basis. PDC negotiated with the federal government to
provide taxation relief for the firms’ contribution to PSDC
training programmes. By 1999, the PSDC was financially
independent and stopped receiving the state government
grant.


PSDC is a non-profit organization of firms in Penang’s FTZs
and industrial estates. It has three membership categories:
founder members, full members and ordinary members.
Founder members paid a premium and were eligible to
be nominated to the management council. The founder
membership list was closed in 1990 with 31 members. Since
1993, full members, like founder members, are eligible to
vote and be nominated to the management council. As the
highest authority of the centre, the management council
sets the priorities and strategic directions. It approves
memberships, appoints members to the management
council and appoints the executive director and other senior
managers.


PSDC started in 1989 with 32 courses for 559 participants;
by 2010 it had offered more than 400 courses to 7,500
participants and trained over 90,000 workers. At the
formative stage, foreign firms featured prominently in its
training activities. Local firms’ engagement has expanded
over the years.


The curriculum was developed through a needs analysis
carried out by the human resources managers of member
companies. PSDC management council members
closely studied MNE-government joint training initiative in
Singapore before designing the initial training programme.
At the beginning, PSDC’s prime focus was on creating a
large pool of technicians to meet the immediate needs of
rapidly expanding electronics firms, particularly just-in-
time measurement and precision engineering skills. Over
the years, the scope and breadth of the organization have
expanded, influenced by technological progress and the
changing operational environment.


In 1996, a USAID-funded study listed PSDC as one of the
10 best workforce development institutions in the world.
Over the years, 11 out of the 13 states in Malaysia have
embraced the PSDC concept of tripartite collaboration to
set up skills centres.


In 2000, PSDC launched a Global Supplier Development
Programme (GSDP), a vendor development programme**.
It aims to assist local companies become world-class global
suppliers by developing their capabilities through training
and forging linkages with MNEs. The training is divided
into two streams: manufacturing and services. Courses are
offered in three areas: core competencies, intermediate
systems and advanced systems. Core competencies
cover basic business and organizational skills SMEs need
to work with large companies. The intermediate system
courses introduce trainees to the latest technologies
used by potential partners. Once an SME has completed
basic training, it is selected to enter an MNE coaching and
mentoring programme. This linkage transfers additional


* Penang Development Corporation, Penang, Malaysia: Strategy & Success, PDC, 2003, Bayan Lepas, Penang.


** Ruffing, L., Deepening Development Through Business Linkages, United Nations Conference on Trade and Development, Geneva, 2006.




CHAPTER IV – GROWING WITH GLOBAL PRODUCTION SHARING IN MALAySIA68


factories. PDC also liaised with the Industrial Research and
Consultancy Service Centre of the Universiti Sains Malaysia
(Malaysian University of Science) to provide technical
courses for SMEs.


By the late 1980s, when skill shortages began to hamper
expansion of the electronics industry, PDC joined with MNEs
to establish the PSDC. PSDC, which inaugurated its first
training programme in July 1989, has since played a pivotal
role in meeting human capital requirements of electronics
firms. In 1998, PDC launched a Young Entrepreneur
Programme to cultivate an entrepreneurial culture among
high school dropouts.


leSSonS from failed ProjectS


In the early 1970s, PDC directly invested in several fields:
electronics and electrical goods, agro-based industries,
construction, mushroom cultivation, precision engineering
and shipbuilding. These projects failed commercially within
a few years. As the Nathan Report correctly predicted, given
its remote location within the Malaysian Federation and the
small domestic market, Penang was not a viable location for
import substitution activities. Once the new projects proved
to be commercial failures the state government swiftly
abandoned them, without trying to make them survive
through direct subsidies.23


This was in sharp contrast to the import substitution attempts
in many other developing countries and in the rest of
Malaysia, where perpetuating inefficient industries became
a drain on government budgets and domestic resources.
Other than the short-lived, state-led industrialization attempt,
the prime focus of economic policy in Penang remained
to create an enabling environment for private sector led
growth.


As already noted, in its investment promotion campaign the
Government did focus on electronics and electrical goods
industries for legitimate considerations of employment
potential and environmental impact, but there was no attempt
to target specific product lines or potential investors within
these industries. At the initial stage of investment promotion
Penang state government focused on electronics and


electrical goods industries for legitimate considerations of
employment potential and environmental impact, but there
was no attempt to target particular investors (firms) within
these industries. The policy emphasis was on supporting
‘all potential winners’24 by creating an enabling environment
for the operation of foreign and local private enterprises.


evolution of the exPort hub


The first MNE to set up an assembly plant in Penang was
National Semiconductor (NS) from the United States. Chet
Singh, PDC’s founding General Manager,25 recalls his first
encounter with NS as follows:


“The NS people arrived at PDC on a Friday
evening in 1971. They had a lot of questions
to ask which, in honesty, we were not able
to answer immediately. I took a bold chance
and asked them to let us have a copy of
the questionnaire and promised that the
information sought would be made available
on Monday.


I suggested that they enjoy a break at the
beach as they had been travelling for over
two weeks. We worked hard during the
weekend and managed to hand over the
very technical questionnaire back to them on
Monday, all filled up. They were impressed.


We then showed them land and other facilities
we had. And they made a swift decision to
come in. Filling the NS questionnaire was an
invaluable experience for us. We realized
that other potential investors too would also
require relevant information. So we prepared
an investment guide for investors based on
the NS questionnaire and our answers.”


The arrival of National Semiconductor was an auspicious
start for the Bayan Lepaz FTZ. Charlie Sporck, the CEO of


skills and technology and monitors progress. After an
agreed period of coaching and mentoring, the MNE decides
whether to accept the SME as part of its supply chain.


In 2010, PSDC set up a Shared Service Centre (SSC),
funded by the federal government, that houses the nation’s
largest electromagnetic compatibility laboratory, an
electromagnetic compliance test lab to serve as a platform
for developing local product design capabilities. PSDC
expects that having local access to state-of-the-art test
equipment will not only make the process of local design
fabrication more economical and flexible, but also reduce
the product-to-market time resulting from the need to send


designs abroad for testing. Currently, Malaysian firms rely
mostly on Singapore and United States laboratories for
electronics manufacturing services testing.


SSC is planning to develop and conduct fast-track training
programme to accelerate the augmentation of engineering
talent. Motorola Corporation has offered to share its Quality
Management Systems, train lab staff and assist the lab to
gain accreditation. For the use of testing facilities, a two-
tier pricing structure will be implemented to ensure that
SMEs are not disadvantaged: the lab will provide baseline
capacity to SMEs at a concessionary rate and additional
capacity to MNEs.




CHAPTER IV – GROWING WITH GLOBAL PRODUCTION SHARING IN MALAySIA 69


National Semiconductor, had started his career at Fairchild
Semiconductor, which is considered the United States
electronics industry’s equivalent of ‘a sycamore tree with
its wing seeds.’26 Two other semiconductor companies,
Advanced Micro Devices (AMD) and Intel, founded by other
‘Fairchild children’, soon followed National Semiconductor
to Penang. Coming to Penang was the first step of the
global spread of both these companies. The Intel plant
later became the largest single employer in Malaysia.27
National Semiconductor set up its first overseas operations
in Singapore in 1968 and came to Penang in search of an
additional low-cost location because of rising labour and
rental cost in Singapore.


Between 1972-1975, five other MNEs set up assembly plants
in Bayan Lepas FTZ: Osrum (a German automotive lighting
manufacturer), Hewlett-Packard (a United States electronics
producer), Bosch (a German auto part producer), Hitachi
(a Japanese semiconductor producer) and Clarion (a
Japanese auto part producer). These eight MNEs, which
drove the industrial transition in Penang, are known locally
as the ‘Eight Samurai’.


ancillary induStrieS emerGe


Following the entry of Eight Samurai, a network of ancillary
industries began to emerge to meet their requirements:
stamped metal components, automation equipment, gigs
and fixtures, machine tools, and molded rubber products.
The MNE-SME partnerships became more prominent over
time, resulting in the growth of a large pool of local tooling
and equipment manufacturing firms. At the beginning,
these supporting industries were dominated by SMEs from
Japan, Singapore and Chinese Taipei. Subsequently, local
firms began to emerge.


Former MNE employees created most of the local firms.
For instance, former Intel employees established LKT
Engineering, Globetronics, Shinca, Shintel and Unico,
and former Motorola employees set up Loshita and BCM
Electronics. Other local firms such as Eng Teknologi and
LKT Engineering expanded their operations benefitting
from vendor development programme launched by Intel,
Motorola and other MNEs (see box 8).


Box 8: Intel’s vendor development programme


Having a well-developed local vendor base for the supply of
jigs, fixtures and tooling services is vital for the expansion of
assembly activities in the electronics and electrical industry.
Local Penang tooling vendors in the early 1980s operated
out of small sheds or backyard workshops and had very
basic equipment suited for low precision fabrication work.
There were too many vendors and cutthroat competition
among them often resulted in poor product quality.
This turned out to be a major hurdle to developing local
supporting industries.


Intel Penang recognized the need to ensure that local
tooling vendors improve their capacity to meet the factory’s
growing needs. This led Intel to initiate an innovative vendor
development programme in 1984*. The programme worked
closely with a few vendors with potential for growth and
involved five steps:


ƒ Identify suppliers, mostly from its former employees,
willing and able to meet its requirements;


ƒ Match Intel’s business needs with the capabilities of the
potential suppliers and provide them with initial training,
using its internal training facilities, the PSDC and the
National Institute of Occupational Safety and Health for
contractor safety certification training;


ƒ Gradually allocate tasks or contracts;
ƒ Continually refine the vendor’s capabilities and promote


continuous improvement though coaching, supplier


briefings, contractor dialogues and business technical
reviews;


ƒ When the vendor gains maturity, help it to become a
global supplier. The purpose at this stage is to assist
the vendor develop a diversified customer base, without
totally relying on Intel for its expansion. The mature vendor
is called upon to supply solutions for Intel’s technical
problems, thus becoming a ‘total solution supplier’. Intel
also shares its ‘technical roadmap’ with the vendor so
that it can prepare for change.


To begin implementing this programme Intel reduced
its vendor base to three local tooling vendors with better
potential for future growth. These vendors were given a
dependable volume of business at premium prices to
enable them to focus on product quality. The expectation
was that the profits would be reinvested to upgrade the
vendors’ capacities and technological capabilities.


The Intel Penang Vendor Partnership programme was the
first of its kind in Penang. Capabilities of participating local
vendors progressed from simple fabrication of jigs and
fixtures to the design of semi-automated equipment and
eventually to turnkey projects requiring higher levels of
hardware and software expertise. This partnership aided
Intel’s operations. With better vendor support, quality levels
improved and faster turnaround of machinery and parts was
achieved. Participating vendors such as LKT and Eng have
since become MNEs (see boxes 9 and 10).


* Lim, P., Steel: From Ashes Rebuilt to Manufacturing Excellence, Kuala Lumpur, Pelanduk Publication (for Intel Technology Sdn Bhd), 1991.




CHAPTER IV – GROWING WITH GLOBAL PRODUCTION SHARING IN MALAySIA70


By the mid-1980s, an export cluster with a sizable number
of branch plants of major electronics and electrical MNEs
and a network of supporting industries was well established
in Penang. Penang had become the world’s largest
exporter and the third largest assembler after the United
States and Japan. The international media dubbed Penang
Asia’s ‘Silicon Island’.28 However, during the first decade of
industrial transition, electronics firms in Penang were almost
exclusively engaged in simple downstream assembly
processes in the semiconductor manufacturing chain. Only
a few companies such as Intel and AMD had started testing
facilities. Four-fifths of the workforce in the 1970s and 1980s
was engaged in jobs requiring little or no skills.29


In the mid-1980s, intense competition from Japanese firms
resulted in increasing automation in electronics assembly.
A number of MNEs and local firms sought to attain critical
aspects of the Toyota process of flow dynamics of multi-
product single line production with its emphasis on zero
defects and low inventory levels. Intel and other MNEs
recognized the need for increased automation to improve
productivity and quality. In-house automation groups were


formed and potential local tooling and other component
suppliers were identified as strategic partners. By the late
1990s most electronics factories had fully automated and
integrated assembly and testing faculties.30


Ancillary industries that evolved around the major electronics
and auto firms expanded rapidly, adding to network
cohesion during this period. Plastics, machine tools and
chemicals were added to the product mix in the early 1990s.
Some Penang firms became suppliers to other high-tech
firms, operating both locally and overseas, in addition to
supplying their MNE partners (Lai 1995). Linkages of MNEs
affiliates with local ancillary factories strengthened over time
due to the improved quality and reliability of local suppliers
and services, rising transportation costs, and exchange
rate volatility. Starting as small backyard workshops, some
of these firms achieved the status of original equipment
manufacturers, with substantial research and development
(R&D) and design capabilities. Over the years, as the input-
procurement practices become well established MNE
affiliates have transferred expertise in fabrication, hardware
and equipment controlling software to local tooling SME


Box 9: Eng Teknologi Holdings Berhad: from backyard workshop to multinational corporation


Teh Ah Ba, a physician with a passion for mechanical
inventions, was one of first local entrepreneurs to foresee
opportunities in the nascent electronics industry in Penang.
In 1974, he set up a backyard workshop, Eng Hardware
Electrical Company, behind his clinic with a start up capital
of RM 500 (US$ 217) to produce jigs and fixtures for a few
semiconductor companies.


After rapid expansion during the next five years, Eng
Hardware Electrical changed its name to Eng Hardware
Engineering with its core business of producing precision
tooling for the semiconductor industry. By 1984, there were
five Eng Hardware Engineering workshops on Penang
Island. The company started automation equipment
assembly in 1983. A year later, Teh Ah Ba organized a pool
of engineers to design, research and develop equipment
automation and metal stamping.


In 1984, the company started direct exports of automation
equipment to the Republic of Korea, Hong Kong SAR,
United States and Singapore. Within two years after the first
shipment left for Seoul, the company built up enough export
potential to become eligible for free trade zone status. In
1987 it moved to a new factory at Bayan Lepaz FTZ.


In 1988, the company began actuator production for the hard
disk drive industry with a new investment of US$ 2.2 million.
The same year saw the birth of Eng Teknologi Holdings
Berhad, the Eng group’s investment holding company. In
1993, it made a strong debut on the Kuala Lumpur Stock
Exchange.


In 1996 its first offshore manufacturing plant, Engtek
International Limited, was set up in Dongguan, China,


followed by a fully integrated manufacturing facility in
Laguna, the Philippines in 1997. Two production plants
were set up in Thailand in 1998 and 2006. In 2003, it
acquired Altum Precision in Singapore, a strategic move to
encompass innovative engineering solutions.


Today, the group’s Integrated Engineering Centre spans
Malaysia, China, the Philippines, Thailand and Singapore,
has floor space of 75,000 sq. metres, and employs over 5,000
skilled workers. Approximately 1,000 computer numerical
control machines are strategically located in production
facilities in these five countries, enabling the company to
meet its global customers’ specific requirements. The
group’s customers include Copeland, Danfoss, Eato,
Emerson Climate Technologies, Fujitsu, Hitachi, IBM, JVC,
Samsung, Seagate, TDK and Western Digital. In 2007, total
group revenue surpassed RM 500 million (US$ 145 million).


Within three decades of its humble beginnings, Eng
Tek Group has attained global recognition as a regional
powerhouse in the precision engineering, manufacturing
and technology sector. It is a world-class global supplier
of hard disk drive components. The group has won several
international accolades and awards including Asiamoney’s
Best Small Managed Company in Malaysia (1999), HSBC
Asia’s Leading Corporate Award (2000), Intel Supplier
Recognition Award (2000), Fujitsu Distinguished Partner
Award (2001), Forbes Global World’s Best Small Companies
(2001), Maxtor Outstanding Supplier Award (2001, 2003 and
2004), Best Local Vendor Award (2002), Emerson Thailand
Supplier Award (2007) and White-Rodgers Best Supplier
Award (2010).




CHAPTER IV – GROWING WITH GLOBAL PRODUCTION SHARING IN MALAySIA 71


partners. Some local firms such as KLT and Globatronics,
after expanding their product lines, became contract
manufacturers, (see boxes 9 and 10).


Contract manufacturers undertake both components
production and assembly for MNEs involved in front-end
activities in the production chain. They run large-scale,
highly automated manufacturing production systems and
are responsible for process innovation. Many MNEs in
electronics and related industries rely increasingly on them
to operate their global-scale production networks, while
limiting their role to head office functions such as product
designing and marketing. This process, facilitated by
standardization of components and advances in modular
technology, has become a major factor in the rapid, global
spread of production sharing.31


from SemiconductorS to
conSumer electronicS and
comPuter PeriPheralS


The next phase of expansion of the Penang export hub began
in the late 1980s with the arrival of consumer electronics
and computer peripherals. Until the late 1980s, there were
no firms involved in consumer electronics assembly, except
Motorola, which was producing two-way radios, mobile
car phones and cordless telephones. From the beginning,
Motorola’s Penang plant was its design centre for these
products. From the late 1990s a number of MNEs, including
Sony, Sanyo, NEC and Dell established assembly plants for
consumer products, such as car stereos, hi-fi equipment,
calculators and telephones. Most consumer electronics


Box 10: LKT Industrial Berhad: from humble foundry to contract manufacturing


Loh Kim Teow, a traditional metal worker, created a family-
run foundry in 1948 to manufacture metal products such
as household fencing, window grills and metal doors as
well as a maintenance and part replacement service for
ships arriving at the Butterworth free port. In the 1960s,
Loh Kim Teow Foundry (LKTF) diversified into making
piling equipment, cement mixers and mobile cranes for the
construction industry.


In the 1970s, LKTF diversified into manufacturing precision
tools and components and fabricating machinery parts for
the semiconductor industry. In 1978, it was incorporated
under the name of LKT Precision Engineering (LKTPE) Sdn
Berhad. In the 1980s, LKTPE further diversified into designing
and manufacturing automation equipment, primarily for the
semiconductor industry. In 1988, the automation section
of LKTPE was transferred to LKT Automation Sdn Berhad.
The company specializes in the design and manufacture of
precision automation equipment with control software. In
1989, LKTPE ventured into precision mold making, plastic
injection molding and manufacturing. These activities were
then transferred to LKT Plastic Technology Sdn Berhad.
Its core business is to manufacture precision engineering
thermoplastic parts and components for audio, disk drive
and automotive industries.


In 1994, after restructuring the three companies, LKT Industrial
Berhad (LKT) was incorporated as the holding company.
In June 1995, LKT was listed on the Kuala Lumpur Stock
Exchange. LKT Wafer Technology, a company designing
and manufacturing semiconductor wafer transfer systems,
was set up in 2000. In the following year, Iconext Sdn Berhad
was incorporated to develop software applications such as
control and monitoring software for automated equipment
quality management solutions and document management
solutions. In 2007, a new 90,000 square foot plant was built
to house the group’s Contract Manufacturing Division. The


group’s integrated manufacturing network provides custom
tooling fabrication, machine structure fabrication, plastic
injection molding, and computer numerical control machine
and assembly solutions to customers across a variety of
industries.


Today, LKT has a worldwide reputation for contract
manufacturing for original equipment manufacturing for
the semiconductor front and back-end industries, surface
mount technology industries, disk drive manufacturing
and other electronics industries. It provides solutions for
equipment outsourcing, ranging from parts procurement to
production installation for end users.


LKT has expanded its operations across the Malaysian
mainland, Singapore and Thailand. In 1999, LKT set up its
first overseas affiliate, LKT Engineering (Thailand) Limited,
which manufactures dies, jigs, and cutting tools for disc
drive, electronic, semi-conductor and other industries.
In 2001, an Industrial Product Division was established in
the Kulim Hi-Tech Park in the State of Kedah for designing
and manufacturing advanced storage solutions including
industrial drawer cabinets, workstations and system racks.
In the same year sales offices were opened in Kuala Lumpur
and Singapore. The groups’ revenue surpassed RM 300
million (US$ 85 million) in 2007. More than 5,000 workers
are employed in its many production plants in Penang.


In 2000, LKT won the inaugural Technology Business
Review award for commitment to continuous innovation. Its
subsidiary, LKT Manufacturing Sdn Bhd, won the Enterprise
50 Award for 2006 organized by the Small and Medium
Industries Development Corporation and Deloitte Malaysia
to celebrate the achievements of home-grown companies
well-positioned for the future. In 2010, Singapore Aerospace
Manufacturing became the majority shareholder of LKT and
renamed it SAM Engineering & Equipment Berhad.




CHAPTER IV – GROWING WITH GLOBAL PRODUCTION SHARING IN MALAySIA72


companies are Japanese-owned, while some have
Taiwanese, Singaporean and Malaysian equity.


In the area of computer peripherals assembly, the most
significant was the arrival of disk drive firms staring in 1988.
Between 1988 and 1991, most major players in this industry,
including Segate, Maxtor, Hitachi Metals, Control Data,
Applied Magnetic and Conner Peripherals, set up assembly
plants in Penang.32 With the emergence of disk drives, local
industry started producing disk drive components, which
require a high level of precision engineering technology.
The industry also engaged in improving and rebuilding
machines based on imported prototype machinery for both
local and regional markets.


Major foreign-owned contract manufacturing companies in
the hard disk drive industry came to Penang in the late 1980s
and early 1990s. Several Singapore-based entities came
between 1989-1990 to provide manufacturing services in
printed circuit board assembly. Several US-based companies
came in the early 1990s to provide circuit board contract-
manufacturing services. The development of locally-owned
contract manufacturing companies took place in the early
1990s. These firms expanded their services to provide total
solution systems for their customers. In the early days, most
contract manufacturers performed on a consignment basis.
By the mid-1990s, most of these companies in Penang were
implementing turnkey operations.


PenanG weatherS Global
chanGeS


Over the past two decades, the Penang export hub has
undergone considerable structural transformation driven by
domestic cost pressure – mainly increasing wages and rents
due to land scarcity – and ongoing changes in patterns of global
production sharing. There has been a significant contraction in
final assembly of consumer electronics and electrical goods.
This has been the outcome of competitive pressure from
China for final assembly, which is more labour intensive than
component assembly, production and testing.


Companies like Sony, Dell and NEC have significantly
scaled down their operations in Penang. At the same time,
firms in the disk drive industry have shifted relatively more
labour-intensive segments in the production process to
other low-cost locations in the region, in particular Thailand
and the Philippines. However, this structural shift has not
resulted in a ‘hollowing out’ of the Penang export hub, as
some observers have inferred simply by looking at those
companies that are leaving or scaling down their operations.


movinG into hiGh-value taSkS


Electronics firms involved in component design, assembly
and testing restructured their operations by moving into
high-value tasks in the value chain, while shifting simple
low-end assembly activities to other low-cost locations.


This process has been greatly aided by the deep-rooted
nature of their production bases, backed by a pool of skilled
workers developed over the past three decades. A number
of large electronics MNEs have shifted regional and also
global headquarter functions to Penang. Manufacturing is
only part of their operations.


Their activities in Penang now encompass corporate and
financial planning, R&D, product design and tooling, sales
and marketing. Most MNEs that have shifted final assembly
of consumer electronics and electrical goods perform the
related trading and services activities from Penang. Some
of them now use their Penang affiliates as an integral part
of their global training and skill enhancement programmes.


Osrum, Motorola and Altera have regional R&D hubs in
Penang. Intel, AMD, Agilent started as assembly operators
but now engage in supplying global shared services within
their global networks. Intel Malaysia is now responsible
for the group’s global shared services. AMD now has its
global shared services and design centre in Penang. Intel
has one of its three global R&D design centres in Penang. It
designed and developed the Atom Chip, which is the core
of the Netbook revolution.


Motorola’s largest R&D facility is in Penang. This facility
is responsible for development and manufacture of all
Motorola two-way communication devices – accounting for
more than 50% of market share.33 Penang plays a pivotal role
in Fairchild’s global production networks by manufacturing
new products and packages, acting as a technical service
centre for global customers, providing leadership and
management support for back-end manufacturing, and
delivering administrative and engineering services. Agilent
Penang accounts for more than 60% of the group’s turnover.


Altera’s largest design centre is in Penang. The company is
currently designing the next generation FGPA chip. Engineers
represent 94% of its current Penang workforce and account
for 60% of its worldwide engineering talent. Western Digital
recently announced that it would build a US$ 1.2 billion
R&D and manufacturing facility in Penang. In 2007, STEC,
a leading global provider of solid-state technologies and
solutions for OEMs, built a facility with complete design,
manufacturing and logistics capabilities in the Bayan Lepas
FTZ. It designs, develops and manufactures custom and
open-standard memory solutions based on flash memory
and DRAM technologies and external storage solutions.




CHAPTER IV – GROWING WITH GLOBAL PRODUCTION SHARING IN MALAySIA 73


diverSifyinG Product lineS


While the electronics industry is still the main engine of
growth in Penang, in recent years the production base
has begun to diversify into a number of electronics-related
dynamic product lines. These include medical services and
equipment, light-emitting diodes (LEDs) and photovoltaic
design and development.


International players in the LED industry have made
significant inroads into the Penang export hub. With its head
start in electronics, Penang could become a major global
LED hub. The MNEs with production plants in Penang
include Osrum Opto Semiconductors, Philips Lumileds,
Rubicon Technology, Globetronics and Dsem and IntraMas.
Osrum, which came to Penang in the early 1970s to
assemble general lighting, now ranks second in the world
in the LED industry. It has wafer fabrication, assembly and
testing operations in Penang. Osrum’s largest production
plant outside Germany and its global R&D centre is in
Penang.


Phillips Lumileds, which has assembly and testing operation
in Penang, ranks fifth in the world LED industry. SILQ, a joint
venture of Semileds Corporation (a LED manufacturer in the
league of Lumileds and Osrum) and IQ Group Berhad, is
involved in LED packaging, modules and final LED lightings
in Penang. Two local contract manufacturers, Globetronics
and CS Opto, have made significant inroads in to LED
industry in recent years benefitting from the emergence of
local LED final product design houses.


The LED industry is poised to grow, driven by increased
LED penetration rates in mobile handsets, notebooks, LCD
(liquid crystal display) televisions, automotive and general
lighting. LED television back lighting (signs and display
segment) is considered to be the most important LED
growth driver over the coming years. Another important
segment for rapid growth of LED lighting is general lighting:
some countries have imposed environmental regulations to
phase out or ban the use of incandescent lighting. Electricity
consumption of LED lighting is six-to-seven times lower than
that of incandescent lighting. LED has gained a new lease of
life in recent years with increasing demand lighting services
from the fast growing economies, in particular China and
India, where providing grid electricity to rural areas is a very
difficult task.34


In the medical services and equipment industry, B. Braun
has been in Penang since 1980. It has a plan to invest RM
1.75 billion in its Penang plant by 2013. This will expand
production capacity by 131% and increase production by
50% by 2013. In recent years, a number of newcomers have
entered the industry: Cardinal Health, St Judes, Accellent,
Small Bone Innovation and Symmetry Medical.


Cardinal Health, a ‘Fortune 18’ company, is one of the
largest healthcare services providers in the world, supplying
pharmaceuticals and products. Symmetry Medical is the


largest contract manufacturer of orthopaedic devices for big
companies such as Strykey, Johnson & Johnson, Zimmer,
Bioner and Smith & Nephews. Cardinal Health also designs,
develops and produces products for other segments of
the medical device market, including arthroscopy, dental,
laparoscopy, osteobiologics and endoscopy. Cardinal
Health also provides specialized products and services
to non-healthcare markets, such as aerospace. It chose
Penang because of accessibility to the major markets of
China and Japan, ease of communication, a strong legal
system with intellectual property protection and the ease of
integration for expatriates.


Symmetry Medical, a provider of products to the global
orthopaedic device industry and other medical markets,
announced in 2008 that it plans to invest US$ 20 million over
the next three years to expand its Malaysian manufacturing,
design and development capabilities. The company is
planning to move its existing facility to a larger, new 50,000
square foot facility in Penang. This facility will house the
regional design and development centre together with a
regional logistics operation, and enable the parent company
to bring its Total Solutions® business model to the Asian
market.


There is a strong presence of established supporting
industries ranging from sterilization services, sterile medical
packaging, precision engineering, tool and die making,
contract molding and assembly, and machinery fabrication
in Malaysia.


The availability of the supporting industries positions
Malaysia as an ideal location for the manufacture of medical
devices with the potential to develop into a medical device
hub in Asia.


conSiderable ProSPectS for
exPanSion


In sum, after 40 years of development, the Penang export
hub has a range of industries, including electronics, electrical
goods, machine tools, general lighting equipment and light-
emitting diodes, and medical devices. Due to domestic cost
pressure and the emergence of competitive production
locations, Penang is no longer an attractive location for
assembly of consumer electronics and electrical goods and
low-end component assembly within the electronics value
chain. These activities have shrunk in recent years.


However, MNEs involved in the electronics design, assembly
and testing activities have restructured and expanded their
operations in Penang. At the same time, some new dynamic
product lines have emerged with considerable prospects
for further expansion, including LEDs, photovoltaic design
and development, and medical devices.




CHAPTER IV – GROWING WITH GLOBAL PRODUCTION SHARING IN MALAySIA74


inveStment trendS and
comPany ProfileS


This section aims to provide some insights into investment
trends and the profile of firms operating in Penang by
piecing together information from various sources.


Systematic analysis of trends in FDI in Penang is hampered
by dearth of data. At the formative stage until about the early
1980s, PDC maintained continuous records of investments
based on administrative records and annual surveys of
firms. In recent years, publicly available data on realized
projects are limited to surveys periodically commissioned
by PDC. As the response rate varies significantly among
the survey years, data from these surveys do not permit
year-to-year comparisons. Moreover, the response rate to
questions relating to sales turnover and investment has
been very poor.


In 1975, there were seven branch plants of MNEs (henceforth
referred to as foreign affiliates or foreign firms) employing
around 2,000 workers in the Byan Lepaz FTZ.35 By the mid-
1980s the number of firms had increased to 59 and they
employed 39,600 workers (PDC 1988). Two decades later,
the 2005 Malaysian Manufacturing Census counted 203
foreign firms employing 215,517 workers (see table 12).


With a modest start in the 1970s, there was a rapid expansion
of MNE entry until about the mid-1990s, as shown in table
12. There has been a notable decline in the number of firms
commencing commercial production over the past 10 years.
This reflects gradual erosion of Malaysia’s attractiveness for
low-end activities in the electronics value chain and final
assembly of consumer electrical and electronics products
due to increasing domestic wages and the emergence of
alternative low-cost investment locations within the region.


The only available continuous data come from the approval
records of the MIDA, summarized in table 13. The number
of approved projects increased, in the 1980s and 1990s, as
Penang was very attractive to MNEs producing consumer
electrical goods and electronics and computer peripherals.


Following a notable decline during the Asian financial crisis
in the second half of 1990s, approved projects have picked
up since 2000. The number of projects approved during
2000-2008 was much larger than the number of firms in
operation belonging to younger operational age brackets,
as illustrated in table 12. This difference reflects that
most new project proposals came from firms already with
production plants in Malaysia rather than from new entrants.
This observation is consistent with findings from interviews
with firms operating in Penang.


Allowing for some erratic fluctuations, capital per worker in
approved projects has increased significantly over the past
two decades, as illustrated in the last column of table 13.
This pattern points to a gradual but persistent shift in the
production structure towards product lines characterized by
greater capital intensity as the labour market tightens.


Foreign firms dominate manufacturing in Penang (see
table 14). In 2007, they accounted for over 85% of total
sales turnover and over 72% of total employment in
the manufacturing sector in Penang, even though they
accounted for only about one-fifth of the total number of firms
in operation. The top 11% of foreign firms in size accounted
for 82% of total sales and 68% of total employment.


The size distribution, measured by employment headcount,
of the top 25 foreign and local firms is depicted in tables
15 and 16. There are 25 foreign firms (with the majority
clustering at a median of around 3,000 workers), accounting
for over 75% of the total manufacturing employment in
Penang. By contrast, employment in the top 25 local firms
varies in the range of 200-1,400 with the majority clustering
at the lower end. These firms account for about 8% of total
manufacturing employment.


In the 1970s, when the first wave of MNEs came to Penang,
there was a general perception that they would soon prove
to be ‘fly-by-night’ operators. However, the data on firms
in operation clearly indicates that most of these firms have
become deeply rooted in Penang, as illustrated in tables
12 and 15. Seven of the Eight Samurai are among the 25
largest foreign firms (see table 15).


Table 12: Branch plants of multinational enterprises operating in Penang, 1970-2004


Commencement year Number of firms
Gross output Employment


RM million % Headcount %


Pre-1970 8 1 054 1.5 3 452 3.6


1970-1974 9 6 301 9.2 11 769 12.3


1975-1979 5 215 0.3 1 061 1.1


1980-1984 11 1 242 1.8 11 136 11.6


1985-1989 52 7 873 11.6 23 454 24.4


1990-1994 63 9 222 13.5 18 301 19.1


1995-1999 32 40 435 59.4 21 273 22.2


2000-2004 23 1 783 2.6 5 585 5.8


Total 203 68 125 100.0 96 031 100.0


Source: Compiled from unpublished returns to the Census of Manufacturing Industries 2005, Department of Statistics, Malaysia.




CHAPTER IV – GROWING WITH GLOBAL PRODUCTION SHARING IN MALAySIA 75


Table 13: Approved investment in Penang, 1980-2008


Year Number of projects
Employment
(headcount)


Investment Capital per worker
(US$)US$ million Foreign share (%)


1980 48 5 522 80.6 45.2 14 588


1981 59 3 655 47.2 39.1 12 923


1982 40 3 842 146.0 38.1 37 998


1983 61 7 275 111.6 39.1 15 345


1984 56 5 158 114.5 24.8 22 205


1985 66 8 184 139.2 33.9 17 011


1986 53 4 101 68.1 50.4 16 607


1987 59 16 662 252.3 86.4 15 143


1988 73 17 833 278.6 76.3 15 622


1989 115 27 032 436.7 87.2 16 157


1990 132 24 952 690.3 79.8 27 666


1991 125 22 455 554.6 66.2 24 697


1992 119 14 295 430.3 57.0 30 099


1993 87 10 378 200.8 50.2 19 346


1994 95 15 203 356.1 70.4 23 423


1995 89 13 779 641.5 39.9 46 559


1996 97 11 993 1 266.1 65.7 105 569


1997 90 9 736 515.1 28.9 52 906


1998 104 10 911 684.3 47.5 62 713


1999 95 14 928 1 257.3 96.2 84 225


2000 132 15 327 1 173.6 79.9 76 569


2001 124 14 630 1 009.8 93.2 69 023


2002 110 13 487 631.1 82.8 46 796


2003 137 9 890 506.0 75.7 51 168


2004 144 9 235 534.3 50.0 57 854


2005 148 21 642 1 221.2 84.5 56 428


2006 156 13 539 1 458.7 73.2 107 738


2007 134 8 833 1 442.2 65.9 163 275


2008 151 22 215 2 932.0 50.1 131 981


Source: SERI database (based on investment approval records of the Malaysian Industrial Development Authority).


Table 14: Ownership structure of manufacturing firms in Penang, as of August 2008*


Firms (%) Sales (%) Employment (%)


Foreign-owned 22.9 85.6 72.3


Large entreprises** 11.3 82.0 68.3


SMEs 11.6 3.6 3.9


Local 77.1 14.4 27.7


Large entreprises** 9.7 9.3 12.6


SMEs 67.4 5.1 15.2


Source: SERI 2008.


Notes: * Based on information provided by 629 of 1,193 enumerated firms.
** Enterprises with annual revenues of more than RM 25 million (US$ 9 million) or more than 150 full-time employees.




CHAPTER IV – GROWING WITH GLOBAL PRODUCTION SHARING IN MALAySIA76
Ta


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s.




CHAPTER IV – GROWING WITH GLOBAL PRODUCTION SHARING IN MALAySIA 77
Ta


bl
e


16
: T


op
2


5
lo


ca
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M
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an


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rts


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S
ou


rc
e:


C
om


pi
le


d
fro


m
S


E
R


I (
20


08
).




CHAPTER IV – GROWING WITH GLOBAL PRODUCTION SHARING IN MALAySIA78


The Malaysian affiliates and firms that arrived later have now
become major players in the regional and global operations
of their parent companies. United States-based MNEs are
the dominant players in the Penang export hub, followed by
Japanese and German MNEs (see table 17).


When the first MNE arrived in the Bayan Lepas FTZ in 1972,
there were only 160 registered manufacturing firms in Penang
and the average firm employed 75 workers.36 The number
of local firms mushroomed from the early 1980s. Some
emerged out of existing small-scale operations, but most
were newly created, often by former MNE employees.


exPort Performance


In 2009, manufactured goods accounted for 97% of total
merchandise exports from Penang, up from 89% in the
early 1990s. The commodity category of machinery,
Section 7 of the Standard International Trade Classification
(SITC), has continued to account for the lion’s share of
electronics components, which accounted for almost 90%
of machinery exports (see table 18). However over the past
two decades, there has been some modest diversification
of the commodity mix. According to the data for 2005, the
only year for that disaggregated data for Penang could
be found, office and accounting machinery (SITC 30) and
radio/TV, and medical appliances and components (SITC
32) accounted for 45% and 38.9% of total manufactured
goods exports (see table 19).


In 2005, foreign firms accounted for 70% of total
manufactured exports (see table 19). The export-output
ratio for foreign firms was 78% compared to 33% for local
firms. The lower figure for the local firms mostly reflects that
most of the local firms in the electronics industry are parts
and components suppliers to the foreign firms. The bulk of
direct exports by local firms are concentrated in consumer
electronics and electrical goods (SITC 322 and 323), which
are relatively more labour intensive and technologically less
sophisticated. Foreign firms’ export composition is relatively
more diversified, but electronics accounts for nearly two-
thirds of total exports.


In 1998, manufactured goods exports from Penang
increased from US$ 90 million in 1973 to about US$ 4.5
billion – amounting to 34% of total manufactured exports
from Malaysia – in the late 1980s. Export growth has
continued at an impressive rate during the ensuing two
decades, notwithstanding a mild slowdown following the
collapse of the dot-com bubble in 2000 and the onset of
the global financial crisis in 2008. The growth rate of exports
from Penang has continuously been faster than that of total
manufactured goods exports from Malaysia. Penang’s
share in total manufactured goods exports from Malaysia
was 39% in 2009, up from about 32% in 1997 (see figure 9;
table 18). In recent years, Penang has accounted for almost
half of the total machinery – electronics and electrical goods
– exports from Malaysia.


Figure 9: Manufactured exports from Penang: value and share in Malaysian exports*, 1990-2009


Share (%) (right scale)Exports, US$ million (left scale)


Source: Based on data compiled from unpublished returns to Manufacturing Census 2005, Department of Statistics, Malaysia.


Note: * Annual average growth rates (%).




CHAPTER IV – GROWING WITH GLOBAL PRODUCTION SHARING IN MALAySIA 79


Table 17: Home-country profile of foreign firms in Penang, 2007


2007 Employment % Number


United States 53 208 46.1 45


Japan 23 643 20.5 41


Germany 12 869 11.1 14


Singapore 10 024 8.7 20


Chinese Taipei 6 932 6.0 35


Netherlands 1 600 1.4 1


Indonesia 683 0.6 3


France 679 0.6 1


Finland 656 0.6 3


Italy 651 0.6 1


United Kingdom 500 0.4 1


Denmark 446 0.4 2


Hong Kong SAR 282 0.2 3


Switzerland 159 0.1 1


Other 3 153 2.7 24


Total 115 485 100.0 195


Source: Compiled from unpublished returns to Penang Industry Survey 2007 conducted by SERI in 2008 for Invest Penang.


Table 18: Merchandise exports from Penang – value, composition and share of total Malaysian exports


1990-1991* 1995-1996* 2000-2001* 2005-2006* 2007 2008 2009


(a) Exports, US$ billion 18.7 58.0 75.5 113.4 127.2 110.8 111.3


(b) Composition (%)


Primary products 10.9 6.0 2.4 3.2 3.4 3.6 2.6


Food beverages and tobacco 3.0 1.2 0.8 0.9 1.1 1.2 1.2


Crude materials 4.3 2.7 1.0 1.6 1.5 1.7 1.1


Animal and vegetable oils and fats 3.6 2.0 0.6 0.6 0.8 0.7 0.4


Manufacturing 88.9 93.8 96.6 96.2 95.8 95.8 96.8


Chemicals 1.3 2.0 2.3 2.3 2.7 2.7 2.6


Resource-based manufactured goods 9.3 5.8 3.3 3.5 4.3 5.1 4.0


Machinery and transport equipment 56.9 74.9 82.3 80.4 77.8 76.3 78.3


Miscellaneous manufacturing articles 20.5 11.1 8.7 9.9 11.0 11.7 11.9


Miscellaneous transactions and commodities 0.4 0.2 0.5 0.7 0.7 0.6 0.5


(c) Share in total Malaysian exports (%)


Primary products 9.2 9.1 8.2 9.5 8.1 5.8 5.5


Food, beverages and tobacco 14.6 10.8 10.3 11.4 11.9 9.4 10.1


Crude materials 6.7 10.4 11.8 16.9 15.3 14.4 13.0


Animal and vegetable oils and fats 10.7 7.2 4.4 4.0 3.6 1.8 1.3


Manufacturing 31.4 28.5 33.9 37.4 37.4 39.6 38.5


Chemicals 15.5 14.8 16.1 12.2 12.7 10.6 12.0


Resource-based manufactured goods 29.0 18.0 16.1 15.0 15.5 14.8 14.1


Machinery and transport equipment 30.6 31.4 38.1 44.0 44.8 53.0 47.4


Miscellaneous manufacturing articles 40.4 29.1 29.5 34.6 36.2 34.2 35.7


Miscellaneous transactions and commodities 20.0 3.5 15.6 11.9 14.4 1.2 18.1


Value (RM million) 24.5 25.1 31.5 33.8 32.9 28.2 33.0


Source: Compiled from customs returns of Penang (SERI database) and UN Comtrade Database (for total Malaysian exports).
Note: * Two-year average.




CHAPTER IV – GROWING WITH GLOBAL PRODUCTION SHARING IN MALAySIA80


Overall, the patterns revealed by the data run counter to
the pessimistic view that the emergence of China as an
export powerhouse has crowded out Penang’s export
performance. This inference is also consistent with the
patterns of structural shifts in the activities of MNEs in
Penang that we have observed earlier. Shifts in MNE
operations in Penang towards high-value component
design, assembly and testing in the global value chain as
well as towards headquarter functions and providing global
services have been aided by the rapid expansion of final
assembly in China.


To probe the role of this shift in the product mix in export
expansion, export value, volume and price (unit value)
indices for electronics exports have been compiled from
Malaysia over the period 1997-2009. (Separate export
data are not available for Penang, but the national data
are representative enough because Malaysia’s exports
in this product category have predominantly originated
in Penang.) The indices are depicted in figure 10. Export
growth in this product category since about 2001 has been
largely driven by price (unit value) increases rather than
volume expansion. The value of total exports has moved in
tandem with export price, while export volume has remained
virtually flat during this period.


a vibrant induStrial centre
with economy-wide imPact


Export-led industrialization transformed Penang from the
site of sluggish primary production into an international


manufacturing hub within a decade. The surplus labour pool
of 80,000 workers, estimated by the Nathan Report in 1969,
had already been absorbed into the manufacturing sector
and related services. The state transformed into a vibrant
industrial centre with electronics factories taking the lead.
Growth continued unabated following a short slowdown
during the global recession in the mid-1980s. At a 2003
conference organized by PDC to celebrate the 30 years of
industrialization in Penang, then Prime Minister Mahathir
summed up Penang’s remarkable economic transformation
as follows:


“I remember the time when Tun Razak [then
Prime Minister of Malaysia] told me that Dr.
Lim Chong Eu had managed to attract some
investors to Penang in the electronics industry.
I was rather sceptical; what are we going to
do with this new-fangled industry?


We did not understand much about
electronics then and soon after that … Tun
Razak … told me that Penang was short of
labour; the electronics industry had created
so many jobs that Penang had to get workers
from the mainland.”37


In the early 1970s, Penang’s per capita GDP was about 10%
lower than the national average. At the state level it was 70%
lower than the state of Selangor, which was the prime focus of
the national development strategy in the post-independence
period. Rapid export-led growth elevated Penang to the
status of the richest state within two decades (see table 20).


Figure 10: Value, volume and price (unit value) indices of electronics exports from Malaysia, 1997-2009


Value Unit value Volume


Source and methodology: Compiled from UN Comtrade Database. Covers 20 products at the HS 6 digit level for which volume data are
available for all years during the period 1997-2009. These products account for about 70% of the commodity category of electronics under the
Standard International Trade Classification (SITC 77).




CHAPTER IV – GROWING WITH GLOBAL PRODUCTION SHARING IN MALAySIA 81


Table 19: Penang’s manufactured exports: composition, export/output ratio and foreign firms’ share in exports, 2005


Tariff
classification Product


Composition (%) Export/output (%) Foreign
firms’


share (%)Total Local Foreign Total Local Foreign


15-16 Food, beverages and tobacco 1.7 4.9 0.3 26.2 25.2 35.2 12.9


17 Textile 0.8 0.2 1.1 72.2 27.0 82.8 92.9


18 Wearing apparel 0.5 0.5 0.5 32.4 17.0 49.9 72.1


19 Leather products and footwear 0.0 0.1 – 20.5 20.5 0.0 0.0


20 Wood products 0.0 0.0 – 6.0 6.0 0.0 0.0


21 Paper and paper products 0.2 0.5 0.0 10.7 9.4 36.2 16.1


22 Printing and publishing 0.1 0.2 0.0 6.8 6.6 52.4 3.0


24 Chemicals 3.9 2.9 4.4 61.0 34.7 78.3 77.5


25 Rubber products 1.5 2.4 1.1 34.0 28.4 41.8 51.3


26 Glass and glass products 0.1 0.2 0.0 12.4 20.6 1.6 5.5


27 Non-ferrous metal products 0.8 2.5 0.1 8.6 9.2 3.9 4.9


28 Structural metal products 1.0 1.8 0.6 33.8 23.8 72.3 44.1


29 Machinery and equipment, non-electrical 0.4 0.7 0.3 28.1 26.3 30.1 51.0


291 General purpose machinery 0.2 0.3 0.2 46.0 29.9 75.5 58.0


292 Special purpose machinery 0.2 0.4 0.2 22.2 27.3 18.4 47.2


30 Office, accounting and computing machinery 44.9 1.6 63.6 82.9 28.3 84.7 98.9


31 Electrical machinery 2.7 0.8 3.6 68.5 32.3 76.7 91.3


311
Electrical motors, generators and
transformers


0.1 – 0.2 79.3 – 79.3 100.0


312
Electricity distribution and control
apparatus


0.1 0.1 0.2 61.2 30.1 86.0 78.3


313 Insulated wires and cables 0.6 0.7 0.5 48.0 35.6 60.9 62.2


315 Electric lamps and lighting equipment 1.9 – 2.8 79.8 – 79.8 100.0


32
Radio/TV, medical appliances and
components


38.9 75.9 22.9 81.1 90.1 70.8 41.0


321 Electrical valves, tubes etc. 32.5 58.5 21.2 85.3 90.5 79.8 45.5


322
Radio, television transmitters and
apparatus


5.2 17.3 – 96.8 96.8 – –


323 Medical appliances and equipment 1.2 0.1 1.7 26.5 4.8 29.2 98.0


33 Scientific/precision equipment 0.5 – 0.6 36.8 0.0 36.8 100.0


331 Measuring and control equipment 0.4 – 0.5 33.3 0.0 33.3 100.0


332 Optical instruments 0.1 – 0.1 69.7 0.0 69.7 100.0


35 Transport equipment 0.1 0.4 – 32.1 32.1 – –


36 Miscellaneous manufacturing 1.9 4.4 0.8 53.9 58.7 17.6 3.8


361 Furniture 0.2 0.6 – 50.4 50.4 – 0.0


369 Manufactures not elsewhere classified 1.0 3.2 0.1 54.6 60.6 17.6 4.5


Total 100 100 100 66.7 52.4 76.1 69.8


US$ million 19 672 5 949 13 723 – – – –


Source: Compiled from unpublished returns to the Manufacturing Census 2005, Department of Statistics, Malaysia.


Note: – Zero or negligible (less than 0.05).




CHAPTER IV – GROWING WITH GLOBAL PRODUCTION SHARING IN MALAySIA82


In 2010, Penang’s estimated per capita GDP was RM 30,860
(US$ 8,700), 57% higher than the national average and 30%
higher than Selangor.


A comparison based on per capita GDP exaggerates
Penang’s level of economic activity among the Malaysian
states because, as discussed below, a larger share of income
generated in Penang accrues to foreign companies as their
share of profits. However, even when household monthly
income is used as an indicator of economic performance,
Penang ranks well above the national average. Household
income is higher than that in Penang only in Selangor and
the federal territory of Kuala Lumpur (see table 21).


The poverty rate – the percentage of people living below
the national poverty line – has also been remarkably lower
in Penang compared to the other Malaysian states (see
table 21). Since the early 1990s, the unemployment rate in
Penang, which has varied annually between 0.5% and 2.5%,
has been much lower than the national average of 1.5% to
4.5%.38


Manufacturing has been the engine of growth in Penang,
accounting for over 40% of GDP over the past three decades
with a mild upturn in recent years (see table 22). By contrast,
manufacturing accounted on average for only 46% of GDP
in 2000 and for 41% of total labour deployment in 2001 in
Malaysia. This figure declined to 36% in 2008 because of
faster growth in services. (See table 22.) Foreign firms play a
much more important role in Penang’s economy compared
to other states in Malaysia. (See table 23 and 24.) For
instance, in 2005 foreign firms accounted for over 61% of


manufacturing value added in Penang compared to about
37% in the entire country.


Criticism often directed at export-oriented growth through
global production sharing concerns the weak linkage
effects of the export sector on the rest of the economy. In
Penang, the share of local raw material to total raw material
used increased from 3% in 1976 to 11% in the early 1980s.39


After two-and-a-half decades of manufacturing expansion,
this had increased only to about 18% by 2005.40 The use
of local inputs in this industry could be somewhat higher in
Penang because the local vendor network there is relatively
well developed compared to elsewhere in the country.41


Linkage effects of firms operating within global production
networks generally tend to be less than those of domestic
market-oriented manufacturing firms. This is because,
unlike meeting consumer requirements in domestic
markets, producing for highly competitive global markets
calls for imported inputs meeting exact quality requirements
and specifications. More importantly, input structures within
global production networks are determined largely by
corporate decisions of MNEs at the global level rather than
by relative-cost differential and other factors specific to a
particular production location.


Despite the weak input linkages, foreign firms have
significantly impacted the domestic economy through
human capital development. The talent pool developed over
the past four decades is now Penang’s primary attraction
for MNEs for locating their upper-end activities and
headquarter functions within global production networks.


Table 20: Per capital GDP in Malaysia and Malaysian States and federal territories (in RM)


1970 1975 1980 1995 2000 2005 2010


Malaysia 994 1431 1681 10 756 14 584 19 189 19 655


States relative to Malaysia (%)


Johor 90.7 94.6 93.6 93.0 96.0 98.0 79.6


Kedah 67.0 54.8 53.6 59.0 61.0 63.0 50.4


Kelantan 46.6 38.1 37.5 42.0 43.0 45.0 29.7


Malacca 80.4 80.2 72.4 105.0 108.0 112.0 101.1


Negeri Senbian 98.7 91.0 88.2 84.0 88.0 91.0 103.6


Pahang 59.6 51.6 59.8 70.0 71.0 76.0 83.6


Penang 91.5 115.8 113.1 140.0 147.0 149.0 157.7


Perak 98.9 85.6 84.1 86.0 90.0 97.0 61.9


Perlis – – – 71.0 74.0 79.0 63.8


Sabah – – – 67.0 63.0 59.0 49.7


Sarawak – – – 86.0 88.0 88.0 108.5


Selangor 162.9 186.0 183.4 132.0 119.0 111.0 121.4


Terengganu 59.6 51.6 59.8 154.0 158.0 154.0 71.5


Source: For 1970 and 1975 from Spinanger (1986), table 1.3; Government of Malaysia (2001, 2006, 2010).


Notes: At 1987 prices. Dashes indicate information that is not available.




CHAPTER IV – GROWING WITH GLOBAL PRODUCTION SHARING IN MALAySIA 83


Most MNEs have indigenized their workforce; only 8% of
CEOs in foreign companies in Penang are foreigners. Many
MNEs draw on managerial and technological expertise of
their Penang affiliates when expanding operations to other
countries.


A major concern in the contemporary Malaysian policy
debate is the slow process of technological upgrading and
productivity growth in export-oriented industries.42 There are
no robust estimates available to check the validity of this
concern for Penang. However, it seems to perform better
than the rest of Malaysia in R&D activities, as revealed by
patent registration data (see figure 11). During 2001-2006
Penang accounted for 37.2% of Malaysia’s registered
patients, up from 10.3% during 1976-1985.


A comparative study of corporate innovative activities in
Singapore, Penang and concludes, ‘Penang as a high-tech
enclave is most certainly not representative of Malaysia as a
whole’.43 The study finds that despite Singapore’s clear lead
over Malaysia at the national level, Penang and Singapore
are at a similar stage of technological development, and
Bangkok clearly trails behind both.


Table 21: Mean monthly gross household income and incidence of poverty, 2004 and 2009


Mean household income (RM) Incidence of poverty (%)


2004 2009 2004 2009


Malaysia 3 249 4 025 5.7 3.8


States as percentage of national mean


Johor 94.7 95.3 2.0 1.3


Kedah 65.4 66.3 7.0 5.3


Kelantan 56.3 63.0 10.6 4.8


Malacca 85.9 104.0 1.8 0.5


Negeri Senbilan 88.8 88.0 1.4 0.7


Pahang 74.2 81.5 4.0 2.1


Penang 108.7 109.5 0.3 1.2


Perak 67.9 69.8 6.3 3.5


Perlis 63.0 65.0 4.9 6.0


Sabah 73.4 77.1 23.0 19.7


Sarawak 83.9 89.0 7.5 5.3


Selangor 158.7 148.1 1.0 0.7


Terengganu 61.1 50.1 15.4 4.0


Source: Government of Malaysia (2006 and 2010).


Table 22: Composition of GDP and employment in Penang, 1970-2008


GDP % Employment %


1970 1990 2000 2008 2001 2008


Agriculture and forestry 3.2 3.2 2.4 1.2 2.4 1.6


Manufacturing 43 43.1 45.7 54 40.8 35.8


Construction 3.2 3.1 2.4 1.6 6.4 5.8


Services 50.6 50.6 49.5 42.5 50.4 56.8


Total 100 100 100 100 100 100


Source: SERI (2010), based on data provided by the Department of Statistics, Malaysia.




CHAPTER IV – GROWING WITH GLOBAL PRODUCTION SHARING IN MALAySIA84


Table 24: Manufacturing employment, capital per worker, labour productivity and average wage/salary: Penang in the
national context, 2005


Employment (number) Employment (%)
Labour productivity


(US$)
Capital per


worker (US$)
Average wage/


salary


Johor 357 733 100.0 12 043 19 844 4 469


– Foreign firms 150 356 42.0 13 904 24 847 4 817


– Local firms 207 377 58.0 10 693 16.216 4 217


Malacca 80 994 100.0 23 274 27 277 4 665


– Foreign firms 35 307 43.6 15 787 13 027 4 656


– Local firms 45 687 56.4 29 059 38 289 4 673


Penang 215 517 100.0 22 100 23 192 6 504


– Foreign firms 96 037 44.6 30 447 27 523 7 950


– Local firms 119 480 55.4 15 391 19 711 5 341


Selangor 410 160 100.0 19 828 30 192 6 264


– Foreign firms 136 598 33.3 25 242 29 245 6 688


– Local firms 273 562 66.7 17 125 30 664 6 053


Other 610 759 100.0 22 509 38 560 4 380


– Foreign firms 126 297 20.7 23 737 40 619 5 309


– Local firms 484 462 79.3 22 189 38 023 4 138


Malaysia 1 675 163 100.0 19 602 29 991 5 148


– Foreign firms 544 595 32.5 22 068 29 313 5 942


– Local firms 1 130 568 67.5 18 414 30 318 4 765


Source: Compiled from unpublished returns to the Manufacturing Census 2005, Department of Statistics, Malaysia.
Note: Values in Malaysian ringgit converted at US$/RM = 3.8.


Table 23: Foreign-ownership in Malaysian manufacturing – Penang in the national context, 2005 (percentage shares)


Value added Employment Salaries and wages Fixed assets


Foreign-owned firms share (%)


Penang 61.4 44.6 54.5 52.9


Johor 48.5 42.0 45.3 52.6


Malacca 29.6 43.6 43.5 20.8


Selangor 42.4 33.3 35.6 32.3


Other states 21.8 20.7 25.1 21.8


Malaysia 36.6 32.5 37.5 31.8


Distribution of foreign-owned manufacturing by state (%)


Penang 24.8 17.7 23.8 17.5


Johor 17.6 27.7 22.5 24.5


Malacca 4.7 6.6 5.2 3.0


Selangor 29.0 25.2 28.4 26.1


Other states 23.8 22.8 20.2 28.9


Malaysia 100 100 100 100


Distribution of total manufacturing by state (%)


Penang 14.51 12.87 16.25 9.95


Johor 13.12 21.36 18.54 14.13


Malacca 5.74 4.83 4.38 4.40


Selangor 24.8 24.5 29.8 24.6


Other states 41.87 36.46 31.03 46.88


Malaysia 100 100 100 100


Source: Compiled from unpublished returns to the Manufacturing Census 2005, Department of Statistics, Malaysia.




CHAPTER IV – GROWING WITH GLOBAL PRODUCTION SHARING IN MALAySIA 85


concluSion


The Penang export hub has matured and consolidated its
position within global production networks over the past
four decades. Concerns that the Malaysian industry has
‘reached a point of saturation and its survival depends on
the capacity to climb up the technology ladder’,44 and that
‘Malaysia’s manufacturing performance has stalled over
time and the sector remains at odds with the objective of
‘moving up the value chain’45 are certainly not consistent
with Penang’s recent growth experience.


As a result of increasing domestic wages and the
emergence of competing low-cost production locations,
Penang’s attractiveness for low-end activities and final
assembly within global production chains has been rapidly
eroding over the past two years. But this has not resulted in
a hollowing out of the Penang export hub. Firms involved
in design, assembly and testing activities in the electronics
and electrical goods value chain have begun to expand and
consolidate their operations in Penang.


More importantly, based on the early-mover advantage in
electronics and the skilled labour pool developed over the
years, the production base has begun to diversify into a
number of electronics-related dynamic product lines with
brighter growth prospects. These include medical services
and equipment, LEDs, and photovoltaic design and
development.


China’s rise as the premier assembly centre does not seem
to have crowded out Penang’s export performance. On the
contrary, there appears to be a complementary relationship
between China’s rise as the premier assembly centre within
global production networks and export performance in
Penang. Rapid expansion of final assembly in China has


been accompanied by a notable shift in MNE operations in
Penang towards high-value component design, assembly
and testing in the global value chain. Reflecting this structural
shift, expansion of exports from Penang in recent years has
been driven predominantly by price increases rather than
volume expansion.


What explains Penang’s success? Penang started the
process of export-oriented industrializations with some
unique advantages. It had a long tradition of both English
and Chinese education, with a literacy rate well above the
national average. From the colonial era it inherited fairly
well developed trade-related infrastructure and institutions.
However, these initial advantages would not have been
translated into a notable economic success if it were not for a
proactive state government led by Chief Minister Lim Chong
Eu, who embarked on a visionary strategy to unleash the
island’s growth potential. The strategy carefully mitigated
the adverse impact of the affirmative action elements of the
1971 New Economic Policy on private-sector initiatives, while
benefiting from Malaysia’s long-standing commitment to an
open trade and investment policy stance, and emphasis on
export-oriented growth.


Penang is a unique example of government marrying its
job creation policy objectives with emerging opportunities
for international specialization by linking its economy to
global production networks. The state government not
only attracted foreign investors, but also helped them
become deeply rooted in the economy through a well-
designed investment promotion strategy including FTZ
status, infrastructure development, skills development and
vocational training, and forging links between local and
foreign firms.


It is hazardous to make sweeping generalization from a
single case study. However, the experience of Penang


Figure 11: Malaysian patent registration: Selangor, Penang and other states, 1976-2006


Selangor Penang Other


1976-1985 1986-1995 1996-2000 2001-2006


100


90


80


70


60


50


40


30


20


10


0


Source: NEAC 2009, Part 1, p. 183.




CHAPTER IV – GROWING WITH GLOBAL PRODUCTION SHARING IN MALAySIA86


does offer a number of policy insights that may be useful to
policymakers in other countries in designing foreign direct
investment (FDI) policy, especially in the context of the
ongoing process of global production sharing.


institutional reforms
The policy reforms began by forming a new statutory body,
PDC as the principal development agency independent of
the formal government structure. The carefully designed
autonomous organizational structure enabled PDC to
effectively perform its role as the centre point of formulating,
implementing and coordinating the export-oriented
industrialization strategy. PDC was successful in creating
in the business community an impression of a unified and
cooperative team with a firm commitment to promoting FDI.


focused investment promotion
After the failure of initial attempts at import-substitution
industrialization, the state government of Penang made a clear
and decisive policy shift to export-oriented industrialization,
with the electronics industry – broadly defined to include
both electronics and electrical goods – as the key focus
of investment promotion. Once the import substitution
projects proved to be commercial failures, they were swiftly
abandoned, without trying to keep them alive through direct
subsidies. The choice of electronics as the priority sector
nicely matched Penang’s source endowment and unfolding
opportunities for international specialization.


The choice of electronics as the priority sector at the outset
also helped in designing an investment promotion strategy
with an industrial cluster focus. The cluster approach
provided a viable setting for promoting MNE-SME linkages
within the export hub. It also created a ‘skill pool’ which
turned out to be the major attraction of Penang as an
attractive location for MNEs in a wide range of industries
with an electronics base.


effective personal involvement from the top
level of government
Chief Minister Lim Cong Eu played an active personal
role in the process, sending a clear, consistent message
to investors about development priorities. He chaired the
State Planning and Development Committee, the apex
policymaking body of PDC, and led investment missions to
the major home countries of prospective investors. The long
tenure of the Chief Minister and his top management team
for over two decades helped to assure consistent policy
and built investor confidence.


post-investment care
PDC created an institutional mechanism to maintain close
links with both MNE affiliates and local firms operating in
Penang. This helped policymakers stay- abreast of investor
requirements and thus continuously adapt to the changing
investment climate. More importantly, this receptivity


approach helped to engage the foreign firms already
operating in Penang in the investment promotion campaign.
PDC often used references from these firms to confirm the
government’s commitment to investment promotion.


infrastructure development
PDC effectively used FTZs and industrial estates as
the vehicles for focused infrastructure development for
successful global integration of the Penang economy.
It successfully addressed the problem of land scarcity
faced in accommodating foreign investors by creating an
innovative land bank through market acquisition of private
land and reclamation.


vocational training and skill development
At the formative stage of the export hub, PDC played an
important facilitating role in labour absorption by the
newly established MNEs by conducting vocational training
programmes. When skill shortages began to hamper the
expansion of electronics industry by the late 1980s, PDC
joined with MNEs to establish the PSDC. The federal
government also helped skill development at the firm level
by offering general tax deductions on MNEs’ contributions
to PSDC schemes and their own skill development efforts.


Fostering MNE-local firm links
From the inception, PDC placed emphasis on developing
a domestic supplier network around the branch plants of
MNEs. This helped increase the economic impact of MNE
presence on the domestic economy through a multiplier
effect and was instrumental in anchoring foreign investors
in the export hub through tighter and more appropriate
supplier relationships. The domestic vendor networks that
initially evolved around semiconductor assembly facilitated
the subsequent diversification of the production base of
the export hub into other product lines such as consumer
electronics and computer peripherals, and more recently to
LEDs and medical devices.




CHAPTER IV – GROWING WITH GLOBAL PRODUCTION SHARING IN MALAySIA 87


annex: SourceS and methodoloGy


This study uses information from three main sources:


ƒ Documents from Penang Development Corporation
(PDC), the Penang state government organization
responsible for investment promotion and public-
private partnership implementation, Invest Penang, the
investment promotion arm of PDC, and the Penang state
government.


ƒ Interviews with senior officials of government and
private sector economic facilitator organizations, senior
managers of major MNE affiliates, and representatives of
chambers of commerce and industry (see annex).


ƒ Firm-level information extracted from the unpublished
returns to the Penang Industry Survey 2007 conducted
by the Socio-Economic and Environmental Research
Institute (SERI), Penang, and the Census of Manufacturing
Industries 2005, conducted by the Malaysian Department
of Statistics.


The names are listed alphabetically by family name.
Interviews were conducted 29 November to 23 December
2010.


ƒ Cheah Eng Kooi, Senior Branch Manager, Federation of
Malaysian Manufacturers.


ƒ Goh Ban Lee, Senior Research Fellow, Socio-Economic
and Environmental Research Institute (SERI).


ƒ K. Gopalan, Vice President, Kazanah Research and
Investment Strategy.


ƒ O. K. Lee, Managing Director, Toray Industries (Malaysia)
Sdn Bhd, and Chairman, Federation of Malaysian
Manufacturer.


ƒ Leong Yueh Kwong, Director, SERI.
ƒ Kelvin Lew, President, Mini-Circuit Technologies


(Malaysia) Snd Bhd.
ƒ Khoo Cheok Sin, Vice Chairman, Federation of Malaysian


Manufacturers.
ƒ Seng Khoon, Engineer, Design Automation, Altera


Corporation.
ƒ Liew Chin Tong, Member of Parliament for Bukit Bendera


and Director, SERI.
ƒ Lim Mah Hui, Visiting Research Fellow, SER.
ƒ Lim Po Li, Director, Total Research and Consultancy Sdn


Bhd, formerly Manager, Strategic Planning and Research,
Penang Development Corporation.


ƒ Lim Teck Yunn, Manager, Front-end & ASIC Design
Automation, Altera Corporation Sdn Bhd.


ƒ Lim Wei Seong, General Manager, SERI.
ƒ Loo Chen Chin, Corporate Affairs Manager, Intel


Corporation.
ƒ Loo Lee Lin, General Manager, Invest Penang.
ƒ Hamdan Abdul Majeed, Senior Vice President, Kazanah


Research and Investment Strategy.


ƒ Suresh Narayanan, Professor of Economics, Universiti
Sains Malaysia.


ƒ Mohd Sofi Osman, Managing Director, Advanced Micro
Devices Export Sdn Bhd, and Chairman, Penang Skill
Development Centre.


ƒ Phan Li Hsia, Executive, Events and Communication,
Invest Penang.


ƒ S. Pitchaiappan, Managing Director, Syarikat Kilang
Rempa Jaya Sakti, Snd. Bhd.


ƒ Chet Singh, Founding General Manager of Penang
Development Corporation.


ƒ Wong Sean Hai, Malaysian American Electronics
Association, and formerly CEO, Intel Malaysia.


ƒ Noorazleen Binti Suhaimi, Investment Promotion
Executive, Invest Penang.


ƒ Toh Kin Woon, Senior Research Fellow, SERI.
ƒ Yoon Chon Leong, former Vice President of Agelant.
ƒ Mark Yeoh, Chief Engineer, Altera Corporation.




CHAPTER IV – GROWING WITH GLOBAL PRODUCTION SHARING IN MALAySIA88


endnoteS


1.Several terms have been used to describe this phenomenon, including
international production fragmentation, vertical specialization, slicing the
value chain and outsourcing.


2. Athukorala, Prema-chandra, ‘Production Networks and Trade Patterns
in East Asia: Regionalization or Globalization?’, Asian Economic Papers,
10(1), pp. 65-95, 2011.


3. Andaya, B.W., L.y. Andaya, A History of Malaysia, 2nd Edition, Houndmils,
UK, Palgrave Macmillan, 2001.


4. Tan Liok Ee, ‘Conjunctures, Confluences, Contestations: A Perspective
on Penang History’, in yeoh Seng Guan, Loh Wei Leng, Khoo Salma
Nasutian and Neil Khor (eds.), Penang and Its Region: The Story of an
Asian Entrepôt, pp. 30-54, Singapore, NUS Press, 2009.


5. Lim, Cong Eu, ‘Building on Penang’s Strengths: Going Forward’,
Penang Lecture 2005, Penang, SERI, 2005. Available at: http:/www.seri.
com.my and Singh, Chet, ‘Institutions for Regional Development: The PDC
as I know It (1970-90)’, in Institute for Strategic and International Studies
(ISIS), Malaysia: Policies and Issues in Economic Development, pp. 597-
622, Kuala: Lumpur: ISIS, forthcoming, 2011.


6. Lim, op. cit., p. 9.


7. Leigh, M., ‘Politics, Bureaucracy, and Business in Malaysia: Realigning
the Eternal Triangle’, in Andrew J. MacIntyre and Kanishka Jayasuriya
(eds.), The Dynamics of Economic Policy Reforms in South-east Asia and
the South-west Pacific, Singapore, Oxford University Press, 115-137, 1992.
Jesudason, J., Ethnicity and the Economy: The State, Chinese Business,
and Multinationals in Malaysia, Singapore, Oxford University Press, 1989.


8. Government of Malaysia, Mid-term Review of the Second Malaysia Plan,
p. 7, Kuala Lumpur: National Printing Department, 1976.


9. Crouch, Harold, Government and Society in Malaysia, Sydney, Allen &
Unwin, 1996.


10. Jomo, S.K., C.H. Wee, ‘The Political Economy of Malaysian Federalism:
Economic Development, Public Policy and Conflict Containment’,
Discussion Paper No. 2002/13, World Institute for Development Economic
Research, 2002.


11. The decision-making body set up to tackle the ethnic conflict with
overall authority over the armed forces, police and civil service.


12. Singh, op. cit.


13. Hutchinson, Francis E., ‘Developmental State and Economic Growth at
the Subregional Level: The Case of Penang’, in Institute of Southeast Asian
Studies (ISEAS), Southeast Asian Studies 2008, pp. 223-244, Singapore,
ISEAS, 2008.


14. The term government-linked company (GLC) is used in Malaysia to
refer to corporate entities in which the Government owns an effective
controlling interest (greater than 50%).


15. Singh, op. cit., p. 612.


16. Singh, op. cit.


17. Lim, Cong Eu, op. cit.


18. Singh, op. cit.


19. Todd, H., ‘Penang: Asia’s ‘Silicon Island’’, Reader’s Digest, pp. 17-21,
March 1986.


20. Singh, op. cit., p. 614.


21. Van Grunsven, L., ‘Evolution versus Creation: The Automation Industry
in Penang,’ Malaysia, in Van Lindert, P., De Jong, A. Nijenhuis, G., Van
Westen, G., (eds), Development Matters: Geographical Studies on
Development Processes and Policies, pp. 215-229, Utrecht, Department
of Human Geography and Planning, Faculty of Geosciences, Utrecht
University, 2006. Hutchinson, op. cit.


22. Rasiah, R., ‘Are Electronics Firms in Malaysia Catching Up in the
Technology Ladder?’’, Journal of the Asia Pacific Economy, 15(3), pp. 301-
319, 2010.


23. Lim, Cong EU, op. cit.


24. As stated by Chet Singh in an interview.


25. Interview, 19 November 2010.


26. Jackson, T., Inside Intel: Andy Grove and the Rise of the World’s Most
Powerful Chip Company, p. 21, New york, Plume, 1997.


27. Intel Corporation was founded 1968 by two former Fairchild
employees, Robert Noyce and Gordon Moore. In 1970, Intel invented the
microprocessor, which revolutionized the electronics industry and set the
stage for Intel to become the world’s most powerful electronics company.


28. Todd, op. cit.


29. Narayanan, S., K.G. Cheah, Technology Transfer to Malaysia: An
Analysis Based on Technology Transfer Agreement, Kuala Lumpur, United
Nations Development Programme, 1993.


30. Lai, y. W., S. Narayanan, Technology Transfer to Malaysia: A Study of
the Electronics and Electrical Industry and its Supporting Firms in Penang,
Kuala Lumpur, United Nations Development Programme, 1994.


31. Sturgeon, T. J., ‘What Really Goes on in Silicon Valley? Spatial
clustering and dispersal in modular production networks’, Journal of
Economic Geography. vol. 3. pp. 199–225, 2003.
Brown, C., G. Linden, ‘Offshoring in the Semiconductor Industry: A
Historical Perspective’, in Brainard, L., Collins, S. M. (eds.), The Brookings
Trade Forum 2005: Offshoring White-Collar Work: The Issues and
Implications, pp. 270-333, Washington DC, Brooking Institution Press,
2005.


32. McKendrick, D. G., R.F. Doner, S. Haggard, From Silicon Valley to
Singapore: Location and Competitive Advantage in the Hard Disk Drive
Industry, Chapter 9, Stanford, California, Stanford University, 2000.


33. New Economic Model for Malaysia, Part 1, Appendix 4, Kuala Lumpur,
National Economic Advisory Council, 2010.


34. Bhusal, P., A. Zahnd, L. Halonen, ‘Energy-efficiency, Innovative Lighting
and Energy Supply Solutions in Developing Countries’, International Review
of Electrical Engineering, 2(5), pp. 665-670, 2007. Dupuis, R. D., Krames,
M. R., ‘Development an Application of High-brightness Visible Light-
emitting Diodes’, Journal of Lightware Technology, 26(9), pp. 1154-1171,
2007.


35. Warr, Peter G., ‘Malaysia’s Industrial Enclaves: benefits and Cost’, The
Developing Economies, 25(1), pp. 30-55, 1987.


36. Census of Manufacturing Industries, Department of Statistics, Kuala
Lumpur, 1973.


37. Mahathir B. Mohamad, ‘The Prime Minister Recollects’, in Penang
Development Corporation (PDC), Penang, Malaysia: Strategy & Success,
p. 15, Bayan Lepas, Penang, 2003.


38. Penang Blueprint 2011-2015, Progress Report, George Town, Socio-
Economic & Environmental Research Institute (SERI), 2010.


39. Warr, op. cit.


40. This estimate uses the 2005 Input-Output table, Department of
Statistics, Malaysia. This figure is for the electronics and electrical industry
in the entire country.


41. Creating Business Linkages: A Policy Perspective, United Nations
Conference on Trade and Development, Geneva, 2010.


42. New Economic Model for Malaysia, Parts 1 & 2, Kuala Lumpur, National
Economic Advisory Council (NEAC), 2010.
Rasiah, Raja (2010), ‘Are Electronics Firms in Malaysia Catching Up in
the Technology Ladder?’ Journal of the Asia Pacific Economy, 15(3), pp.
301-319, 2010.
yusuf, S., K. Nabeshima, ‘Can Malaysia Escape the Middle-Income
Trap? A Strategy for Penang’, Policy Research Working Paper No 4971,
Washington DC, World Bank, 2009.


43. Dies, J. R., M. Kiese, ‘Scaling Innovation in South East Asia: Empirical
Evidence from Singapore, Penang (Malaysia) and Bangkok’, Regional
Studies, 40(9), pp. 1014, 2006.


44. United Nations Conference on Trade and Development, op. cit.


45. National Economic Advisory Council, op. cit., Part 1, p. 181.






©
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chaPter v


creating integrated
textile parks in india
public-private partnerships drive world-
class facilities


case study executive summary �������������������������������������������������������������������������������������������������������������������� 92


market trends ������������������������������������������������������������������������������������������������������������������������������������������������������ 92


essentials for integrated textile parks ������������������������������������������������������������������������������������������������ 95


pochampally handloom park ������������������������������������������������������������������������������������������������������������������������ 97


brandix india apparel city ������������������������������������������������������������������������������������������������������������������������������� 99


conclusion ���������������������������������������������������������������������������������������������������������������������������������������������������������� 100




CHAPTER V – CREATING INTEGRATED TExTILE PARKS IN INDIA92


creatinG inteGrated textile
ParkS in india
Public-Private PartnerShiPS drive world-claSS
facilitieS


caSe Study executive
Summary


The textile and clothing industry is the second largest
employer in India and a vital component of the nation’s
economy. In the middle of the last decade, industry growth
was becoming sluggish and employment was declining.


Given the dwindling fortunes of the Indian textiles and
clothing sector, modernization of the sector became
imperative. In 2005, the Government of India introduced
the Scheme for Integrated Textile Parks (SITP), designed
to strengthen infrastructural facilities in potential textiles
growth areas.


The concept of clustering related businesses for critical
mass and efficiency is a well-known strategy, applied to
export processing zones, industrial parks and informal
associations of entrepreneurs in business corridors. What
sets this Indian case apart?


ƒ First, the financial model is innovative. It combines
government subsidies, loans from financial institutions,
and equity participation from the firms that benefit from
the arrangement.


ƒ Second, the pro-poor orientation is unique. The public-
private partnership targets job creation that benefits
women and poor communities. Tens of thousands of new
jobs have already been created since the project began
in 2005.


ƒ Third, although the programme runs throughout 2012, it
is already being reviewed as a replicable model, both in
India and elsewhere.


The clusters set up under the SITP are notable because
both public and private actors worked together to provide
world-class facilities for the textiles sector. The initiative for
developing the SITP came from the federal government.
The roles of all participants were clearly spelled out and the
public-private partnership produced the desired results.


The case study first examines the state of the Indian textile and
clothing industry during the last decade. It then discusses


the elements of the public-private partnerships established
under the SITP. Finally, it describes two integrated textile
parks created under the SITP: Pochampally Handloom Park
and Brandix India Apparel City (BIAC).


market trendS


In 2008-2009, the Indian textiles and clothing industry
generated sales of US$ 55 billion, nearly one-third of which
was sold in the domestic market. During the same period,
the industry contributed nearly 2% of India’s GDP.


Direct and indirect employment provided by the textiles
and clothing industry has been estimated at 35 million
and 55 million respectively,1 which is nearly one-fifth of the
total factory sector industrial work force. The industry is
the second largest employer in the Indian economy after
agriculture.


The output of textiles and clothing firms more than doubled
in value in US dollar terms during the period 2000 to 2009.
The economic downturn in 2008-2009 impacted on the
industry – while output fell nominally, employment declined
by over 10% (see table 25).


Production of textiles and clothing saw impressive gains
until 2007 when growth momentum slowed (see figure 12).
However, the number of factories increased only marginally
between 2001 and 2006, and in 2007-2008 there was
a 12% decline. This dip in the number of factories was
accompanied by an even larger decline in total employment
in the sector.


The performances of various segments of the sector diverge
from the sector’s overall performance. yarn production
increased only about 33% between 2000 and 2008 (see
figure 13). Cloth production saw similar growth dynamics
(see figure 14). In contrast, production of ready-made
garments registered a consistently upward trend, with the
exception of 2007-2008, when the economy turned down
(see figure 15). Average annual growth rate for this segment
was nearly 12% from 2001 to 2009.




CHAPTER V – CREATING INTEGRATED TExTILE PARKS IN INDIA 93


Table 25: Scope of Indian textiles and clothing industry, 2000-2009


Year
Value of output


(in US$ millions)
Number of factories (in ’000) Total persons employed (in ’000)


2000-2001 23 534.6 16.9 1 619.6


2001-2002 20 249.0 15.8 1 499.2


2002-2003 22 018.6 16.1 1 514.1


2003-2004 24 849.9 16.2 1 589.5


2004-2005 30 029.2 16.9 1 714.6


2005-2006 35 302.5 17.5 1 878.9


2006-2007 47 097.4 18.7 2 386.5


2007-2008 49 700.6 16.5 2 090.4


2008-2009 49 020.0 19.1 1 873.4


Source: Annual Survey of Industries.


Figure 12: Growth performance of textiles and clothing sector, 2001-2008


-20.0


-10.0


0.0


10.0


20.0


30.0


40.0


2001


% increase


2002 2003 2004 2005 2006 2007 2008


Source: Annual Survey of Industries.


Figure 13: Yarn production, 2000-2008


0.0


0.5


1.0


1.5


2.0


2.5


3.0


3.5


4.0


4.5


Billion kg


0.0


10.0


20.0


30.0


40.0


50.0


60.0


Billion m2


0.0


5.0


10.0


15.0


20.0


25.0


30.0


35.0


US$ billion


20012000 2002 2003 2004 2005 2006 2007 2008


20012000 2002 2003 2004 2005 2006 2007 2008


20012000 2002 2003 2004 2005 2006 2007 2008


Source: Indiastat.




CHAPTER V – CREATING INTEGRATED TExTILE PARKS IN INDIA94


SluGGiSh Growth


In recent years, textiles and clothing exports from India grew
at a relatively sluggish rate of around 7%, while total exports
were consistently registering double-digit growth rates. This
trend was particularly visible from around 2005 when the
WTO’s Agreement on Textiles and Clothing (ATC) – also
known as the Multifibre Arrangement (MFA) – was phased
out, ending the decades old quota regime that influenced
trade in this sector. Contrary to expectations that phasing
out the ATC would stimulate India’s textiles and clothing
sector, exports from the sector lost momentum. After the
phase out of the ATC in January 2005, there was an initial
spurt in exports. However, this growth momentum was not
maintained in subsequent years.


Decreased growth of exports of textiles and clothing from
India in recent years resulted in a near stagnation in India’s


global share in textiles and clothing trade. At the same time,
major producers like China in both textiles and clothing
and Bangladesh in the clothing sector have increased their
market shares. However, India’s indifferent performance
has adversely affected its position as a major exporter of
textiles and clothing.


More than half of textiles exports from India are ready-made
garments. Exports from this segment declined about 15%
by 2009, due to the end of the MFA, but have stabilized and
again started to rise.


The share of textiles and clothing in India’s total exports has
declined sharply since 2000-2001 when the contribution of
this sector was nearly 25% (see figure 16). In 2009-2010,
the sector’s share had declined to about 11%. Emergence
of a few fast-growing export sectors resulted in the relative
decline in the importance of the textiles sector.


Figure 14: Cloth production, 2000-2008


0.0


0.5


1.0


1.5


2.0


2.5


3.0


3.5


4.0


4.5


Billion kg


0.0


10.0


20.0


30.0


40.0


50.0


60.0


Billion m2


0.0


5.0


10.0


15.0


20.0


25.0


30.0


35.0


US$ billion


20012000 2002 2003 2004 2005 2006 2007 2008


20012000 2002 2003 2004 2005 2006 2007 2008


20012000 2002 2003 2004 2005 2006 2007 2008


Source: Indiastat.


Figure 15: Production of ready-made garments, 2000-2008


0.0


0.5


1.0


1.5


2.0


2.5


3.0


3.5


4.0


4.5


Billion kg


0.0


10.0


20.0


30.0


40.0


50.0


60.0


Billion m2


0.0


5.0


10.0


15.0


20.0


25.0


30.0


35.0


US$ billion


20012000 2002 2003 2004 2005 2006 2007 2008


20012000 2002 2003 2004 2005 2006 2007 2008


20012000 2002 2003 2004 2005 2006 2007 2008


Source: Indiastat.




CHAPTER V – CREATING INTEGRATED TExTILE PARKS IN INDIA 95


Underperformance of the Indian textiles and clothing sector
during the last decade meant that the sector was unable
to take advantage of the increased opportunities in global
markets following the phasing out of the ATC in 2005. India’s
share in global exports of textiles and clothing stagnated,
particularly since the end of the quota regime.


Given the dwindling fortunes of the sector, modernization
became imperative. The Government believes the SITP is
the right way forward. Its 11th Five year Plan (2007-2012)
envisages India securing a 7% share in the global textiles
trade by 2012.


eSSentialS for inteGrated
textile ParkS


In 2005, the Government launched the SITP. In 2008, it was
extended an additional four years to 2012. The SITP aims to:


ƒ Provide world-class infrastructure facilities for textile
and clothing business units meeting international
environmental and social standards;


ƒ Create new textile parks of international standards
at potential growth centres by engaging a panel of
professional agencies for project identification and
execution.


The SITP targets industrial clusters and locations with
high growth potential that require strategic interventions to
improve their competitiveness. Project costs cover common
infrastructure and buildings for production and other support
activities, including textiles engineering, accessories and


packaging needed by each ITP. Developers of ITPs have the
flexibility to suit local requirements.


ITPs can comprise either the full value chain of textiles or
separate textile products. They are implemented through
public-private partnerships with industry associations
or groups of entrepreneurs as the main promoters. This
model was adopted to attract large domestic and foreign
investments in textile clusters. Federal and state governments
and agencies provide the enabling environment. To
implement the projects, a panel of professional managers
selected by the Ministry of Textiles is entrusted with the task
of identifying locations and setting up the facilities.


When the SITP was adopted in 2005, the Government
expected that 25 ITPs would be established in the first two
years. Every ITP would normally have 50 business units with
a total estimated investment of INR 7.5 billion. The number of
entrepreneurs and the investments they could make in each
ITP could vary between projects. However, the aggregate
investment by the entrepreneurs in land, buildings, plant
and machinery in an ITP must be at least twice the cost of
common infrastructure proposed for the park.


An assessment made by the Government in 2010 showed
that the ITPs had attracted investment of INR 35 billion
and had generated employment for 15,000 workers. Of
the 40 ITPs for which information is available, the number
of entrepreneurs participating has varied from as few as
seven to 171. The BIAC has only 17 entrepreneurs involved,
although the venture is the largest in terms of the land it
occupies. The average number of entrepreneurs is around
55 per park.


Figure 16: Share of textiles and clothing in India’s total exports, 2000-2009




0.0


5.0


10.0


15.0


20.0


25.0


30.0


% share in total exports


20012000 2002 2003 2004 2005 2006 2007 2008 2009


Source: Directorate General of Commercial Intelligence and Statistics, Ministry of Commerce, Government of India.




CHAPTER V – CREATING INTEGRATED TExTILE PARKS IN INDIA96


Over the past several years, the Government has actively
established special economic zones (SEZs). SEZs are
export clusters that provide infrastructure and other facilities
comparable to international best practices. ITPs can be set
up in the SEZs. The essential elements of the textile clusters
are discussed below.


financinG


Project costs are covered through a mix of equity or grants
from federal and state governments; industrial development
corporations established by state governments, industry
and project management consultants; and loans from
banks and other financial institutions.


Financial participation by the federal government in the form
of grants or equity is limited to 40% of the infrastructure
cost, subject to a cap of INR 400 million. The private sector
raises the remaining 60% of the resources needed to
finance infrastructure costs. Private sector participants are
the majority stakeholders because governments and their
agencies cannot hold equity stakes exceeding 49% of risk
capital.


Public and private sector participants make their financial
contributions simultaneously. The Government releases
its grant in stages, synchronized with contributions by the
private sector. The private sector is able to raise resources
from banks and other financial institutions that recognize
value in the concept of common infrastructure and the
positive impact on profitability of units participating in the
ITPs.


The financial contribution made by the governments for
developing infrastructure, 40% of the total cost, increases
the competitiveness of the business units in the parks,
which enables them to better service debt.


Banks see the potential for large numbers of SMEs in one
location. Banks have provided a ‘single product, single
window’ type of approval for units located in a park, thus
enabling faster loan processing.


Private-sector entities are the majority partners and owners
of the assets of the parks. Responsibility for maintaining
the infrastructure rests with the private entrepreneurs
who participate in the parks. The resources needed for
maintenance are collected in the form of user charges,
which are in proportion to the land and built-up space
occupied by the members. The principle of equity guides
the user charges, that is, the larger units contribute more
for the upkeep of the infrastructure of the parks. Charges
for water, electricity and effluent treatment are collected on
the basis of usage independent of the area occupied or the
size of the unit.


Shared infraStructure, facilitieS
and coStS


The ITPs are based on the concept of agglomeration;
participating units take advantage of common infrastructure
facilities. In addition to land accommodating a large number
of units, common infrastructure includes compound walls,
roads, drainage and water supply, electricity supply
including captive power plants, effluent treatment and
telecommunication facilities.


The parks also have common testing laboratories,
equipment, design centres trade and display centres,
warehouse facilities, raw material depots, packaging units,
crèches, canteens, workers’ hostels, offices of service
providers, labour rest areas, recreation facilities and
marketing support systems.


The parks have common training centres with equipment.
Training courses provide skilled labour to the business units
in the park. The parks may charge trainees a nominal fee for
the training.


SMEs located in the ITPs benefit from common infrastructure.
They can reduce costs by eliminating the need to set up
individual facilities that are essential for international markets,
such as testing laboratories. The proliferation of technical
standards in major markets creates formidable challenges
for manufacturers in developing countries as their products
and processes often must meet these standards in markets
where margins are wafer thin. Sharing costs to meet global
standards benefits SMEs.


imPlementation throuGh Public-
Private PartnerShiPS


The principal promoters of ITPs are industry associations
or groups of entrepreneurs. The parks are developed
through public-private partnerships (PPPs) with substantial
government involvement at both federal and the sub-federal
levels. The partnerships are implemented through Special
Purpose Vehicles (SPV) formed with the representatives
of local Industry, financial institutions, state and federal
governments and a corporate body registered under the
Companies Act, 1956.


SPVs are legal entities created to fulfil limited objectives.
SPVs are typically used by enterprises to isolate themselves
from financial risk. An enterprise will transfer assets to an
SPV for management or use the SPV to finance a large
project with a narrow set of goals without putting the entire
enterprise at risk. SPVs are also commonly used in complex
financing to separate different layers of equity investment.


SPVs have operational autonomy and therefore can address
all issues essential for the effective functioning of the ITPs.
Operational autonomy ensures that the SPVs do not suffer
from institutional limitations that can affect the performance




CHAPTER V – CREATING INTEGRATED TExTILE PARKS IN INDIA 97


of public sector enterprises. SPVs implement the ITPs. Their
responsibilities include the following:


ƒ Conceptualizing, formulating, and achieving financial
closure;


ƒ Implementing and managing the infrastructure;


ƒ Procuring land, the cost of which is built into the project
cost;


ƒ After developing the infrastructure, allocate sites for
business units;


ƒ Facilitating securing bank finance required by the
business units;


ƒ Maintaining the utilities and infrastructure by collecting
service and user charges;


ƒ Remaining self-sustaining with a positive revenue stream;


ƒ Appointing contractors and consultants in a fair and
transparent manner;


ƒ Ensuring timely completion of the projects by obtaining
appropriate performance guarantees from consultants
and contractors.


Project manaGement


After an ITP project is conceived, the Indian Ministry of
Textiles appoints a project management consultant, who
is responsible for promptly implementing the project with
a high degree of quality at a low cost acceptable to the
members of the SPV. The Ministry of Textiles supervises
the projects and monitors progress. Project management
consultants are responsible for:


ƒ Identifying locations for the ITPs based on an assessment
of the demand and potential of the area;


ƒ Facilitating the formation of SPVs with the participation of
local industry;


ƒ Preparing project plans, including standards for
infrastructure;


ƒ Developing project plans and submitting them to Project
Approval Committees (PAC);


ƒ Assisting the SPVs in selecting agencies to prepare
bid documents, as well as constructing, operating and
maintaining the facilities;


ƒ Assisting the SPV in achieving financial closure;2


ƒ Monitoring implementation and submitting periodical
progress reports to the Ministry of Textiles;


ƒ Liaising with state governments to resolve state-related
problems;


ƒ Ensuring timely completion of projects as directed by the
PAC.


adminiStrative mechaniSmS


Projects submitted by project management consultants
are considered by the Project Scrutiny Committee (PSC),
which is comprised of senior officials of the Ministry of
Textiles, the Ministry of Finance, the Planning Commission,
the Department of Commerce, the Department of Industrial
Policy and Promotion, the Ministry of Environment and
Forests, and the Textile Commissioner.


The PSC appraises the proposals submitted by project
management consultants for project components, viability,
feasibility and timelines. The PSC considers the utility of
the projects in terms of modernization and integration
of supply and management chains, and makes the final
recommendations to the PAC.


The PAC, which is headed by the Minister of Textiles
and includes two senior Ministry officials, considers the
recommendations of Project Scrutiny Committee and
gives final approval to a project. The Ministry of Textiles
periodically reviews the progress of projects under the
SITP. Project management consultants are responsible for
devising suitable monitoring and evaluation systems.


the role of State GovernmentS


State governments play an important role in developing
ITPs. India’s state governments are interested in becoming
partners because ITPs foster economic development and
employment. State governments perform the following
tasks:


ƒ Provide requisite clearances for setting up ITPs and
necessary assistance for power, water and other utilities;


ƒ Assist in identifying and procuring suitable land;
ƒ Participate in the projects by subscribing to the equity of


SPVs or by providing grants;


ƒ Provide flexible and conducive labour environment and
special facilities like tax exemptions for the units in ITPs;


ƒ Integrate ITPs with other industrial development schemes
for overall effectiveness and efficiency of the projects.


PochamPally handloom
Park


Pochampally Handloom Park is an ITP developed to
preserve, improve and market the traditionally rich, high
quality and valuable products produced by this natural
handloom-weaving cluster, which is one of India’s most
popular traditional silk weaving centres.


The park, which was approved by the Ministry of Textiles
in 2006 and became operational towards the end of 2008,




CHAPTER V – CREATING INTEGRATED TExTILE PARKS IN INDIA98


was created to address major constraints faced by the
Pochampally handloom producers, including:


ƒ Largely disorganized, dispersed and decentralized
activities;


ƒ Non-conformity to quality standards, a lack of branding of
handloom products and a lack of promotional initiatives;


ƒ A traditional mode of production with low technology and
a conventional product range;


ƒ Low productivity;
ƒ Inadequate working capital;
ƒ Weak marketing links and untapped foreign markets,


resulting in stagnation of production and sales;


ƒ Competition from the power-loom and mill sector.


Addressing these constraints was expected to unlock the
production potential and help producers move up the value
chain.


Pochampally textiles are woven by using a tie-dye technique,
popularly known as ‘Ikat’. Pochampally textiles are one of
the first handloom weaving products to have received a
Geographical Indication Certificate.


Pochampally Handloom Park has six unified common
clusters that combine several activities, including handloom
weaving including yarn processing, dyeing and preparation.
Located 60 kilometres from Hyderabad, the capital of the
state of Andhra Pradesh, the park covers 23 acres. The park
has been equipped to provide strong backward and forward
linkages for planned and sustained development that will
provide employment to the weavers in the region. The park
is expected to provide additional employment opportunities
and venture into diversified products in domestic and
international markets.


The total project cost of Pochampally Handloom Park was
estimated at INR 340 million. The investment in the park was
estimated at nearly INR 476 million, with annual turnover of
around INR 350 million.


Approved by the Ministry of Textiles in 2006, the Pochampally
Handloom Park was implemented through an SPV,
Pochampally Handloom Park Limited (PHPL). The Ministry
of Textiles appointed Infrastructure Leasing & Financial
Services, one of India’s leading infrastructure development
and finance companies, as the project management
consultant to oversee the execution of the Pochampally
Handloom Park. The progress and the execution of the
project was the responsibility of PHPL’s Board of Directors.


In addition to the master weavers who are both promoters
and directors of the project, PHPL’s Board of Directors
includes nominee directors from the Ministry of Textiles,
Government of India, New Delhi; the Department of
Handlooms & Textiles, Government of Andhra Pradesh; and
Infrastructure Leasing & Financial Services, Mumbai.


more ProfitS for ProducerS


The principal objective of this project is to ensure that
modern infrastructure improves the skills of the handloom
weavers in Pochampally and enables them to produce
trendy, quality products at reasonable prices. Improving
product quality is key to increasing exports, thus making the
producers more economically viable.


The state-of-the-art Pochampally Handloom Park was
designed to facilitate production of high-end products
meeting international quality standards that can sustainably
penetrate international markets. To meet the park’s
objectives, the producers must do several things, including:


Figure 17: Job creation - Pochampally’s three-stage strategy


Training and upgrading
handloom weaving,
dyeing and processing skills


Creation of 5 000
trained handloom
weavers


Employing trained
handloom weavers in
the project


Proprietary inclusion -
allotting equity shares to
weaver members


Sharing of ownership
with 5 000 weaver
members


Creation of
employment for 5 000
trained weavers


STAGE – 1
RESULTING IN


STAGE – 2
RESULTING IN


STAGE – 3
RESULTING IN


Source: IL&FS.




CHAPTER V – CREATING INTEGRATED TExTILE PARKS IN INDIA 99


ƒ Flexibly diversify products and continuously innovate
towards custom-made designs for foreign markets, as
well as produce on time and in volume;


ƒ Upgrade technology to develop low-cost and efficient
handlooms;


ƒ Obtain maximum cost-benefit ratios through effective
operations and management systems;


ƒ Strengthen all aspects of the business, including market
information, raw material supply, design, merchandizing,
market development, production, inventory management
and the entire supply chain.


The park’s promoters adopted a participatory business
model making about 5,000 handloom weavers stakeholders
through allotment of equity shares. Including the handloom
weavers as stakeholders was considered important for
creating new job opportunities. As the weavers participated
in decision-making, they created systems for regular training
and skill development. New skills enabled the weavers
to sustain and strengthen their traditional knowledge and
skills. New skills also improved the employability of the
weaver-artisans.


StrateGieS for SucceSS


Pochampally Handloom Park adopted a three-stage strategy
(see figure 17) for job creation and economic growth.


This model seeks to provide the handloom weavers with
sustainable livelihoods. In the first stage, the weavers are
given the necessary training. Once appropriately trained,
the weavers are employed in the park. Finally, the weavers
receive an ownership interest in the SPV.


The SPV contracted with Infrastructure Leasing & Financial
Services to provide domestic and international marketing
support. The SPV is also working to modernize the weaving
equipment and to market the products in Indian and
export markets through participating in trade fairs in India
and abroad. To increase the visibility of products, the SPV
launched a new brand – ‘Ikat Art’.


brandix india aPParel city


Brandix India Apparel City (BIAC), a 1,000 acre integrated
textile and apparel park, is a SEZ. The park, which opened
in May 2010, is located at Achutapuram-Rambilli Mandals,
about 50 kilometres south of Visakhapatnam in Andhra
Pradesh.


BIAC was developed with the active support of the state
government of Andhra Pradesh. It aims to bring large-
scale employment opportunities to rural people, mostly
women, in a nascent, but strategically important apparel
exports segment. The park leverages Andhra’s availability
of raw cotton, abundant water from the Godavari River,
power availability and access to a container port. The
Government of India extended financial support under its
STIP.


The state government actively involved Brandix Lanka, Sri
Lanka’s largest integrated apparel exporter, to conceive and
manage BIAC. Other global apparel supply chain partners
supporting this venture are Brandot, United States; Pioneer
Elastics, Hong Kong SAR; CMT, Mauritius; and Quantum
Clothing, United Kingdom.


Box 11: Pochampally Handloom Park – accomplishments


Pochampally Handloom Park is well on its way as a model
for pro-poor export-led growth. The public-private sector
collaboration has been fruitful.


Modernized production. Thanks to the public-private
infrastructure investment model, the park has helped
businesses improve production by mechanizing pre-
weaving, upgrading weaving technology and modernizing
dyeing techniques and handlooms.


Pro-poor training programmes in surrounding communities.
Poor communities in villages surrounding the park have
upgraded their skills through training. Women have been
a focus of the training programmes. Public awareness
workshops have also been held to disseminate the park
concept and publicize the need for upgraded skills. This
has led to a growth in enrollment by artisans.


Stronger marketing. By grouping the efforts of firms for
critical mass, stronger marketing has been possible.
Vendors’ meetings have been held at the National Handloom
Development Corporation and the Karnataka Silk Marketing
Board. These have led to:


ƒ A contract with one of Asia’s leading designers to
establish products in export markets;


ƒ Participation in international trade fairs in Mumbai and
Frankfurt, Germany;


ƒ Launch of the ‘Ikat Art’ brand;
ƒ Contracts with Reliance, Shoppers Stop and other chain


stores in most of the major cities in India;
ƒ An agreement with Infrastructure Leasing & Financial


Services for marketing support in domestic and
international markets.




CHAPTER V – CREATING INTEGRATED TExTILE PARKS IN INDIA100


a foreiGn direct inveStment
ShowcaSe


BIAC has become an important example of successful
foreign investment in a sector with high growth potential. The
project attracted finance from Sri Lanka and has become a
showcase for investment cooperation between India and its
South Asian partners. Through this project, Brandix Lanka
has organized a consortium of firms leveraging on its strong
presence in Sri Lanka.


Established in the early 1980s, Brandix Lanka employs over
25,000 people in more than 27 manufacturing facilities in
Sri Lanka and its strategically located international sourcing
offices. Brandix’s business model encompasses vertical
integration and specialization in key product categories
in both woven and knit apparel. Backward integration
into both woven and knit fabrics complements its product
specialization in trims and washing/finishing, thus enabling
Brandix to provide a unique total solution to its global
branded clothing retailers.


BIAC is based on the fibre-to-store concept, underpinned
by scale advantages and strong apparel business
fundamentals. It seeks to leverage global expertise offering
total solutions within its 1,000 acre park – a first in South
Asia and perhaps in the world, thus advancing BIAC’s vision
to be the ‘preferred global sourcing hub for apparel’.


To achieve its vision, BIAC has created a vertically integrated
apparel value chain ready to support large-scale spinning,
knitting, garmenting, finishing, printing, embellishments
and packaging. Its operations are supported by the park’s
centralized infrastructure and common services and
facilities.


Government infraStructure


The state government has created the much-needed
external infrastructure critical for an integrated park of this
size to succeed. It constructed a 200 MW substation with
two feeders from three separate grid-sources for reliable
power supply. Water connections have been provided.
BIAC has assured supplies of 60 million litres per day of raw
water through a 26 kilometre long, 1,000 millimetre diameter
pipeline from pumping stations at Parvada supplying
Godavari river water to the city of Vizag. To sustain this kind
of water supply the Government is setting up a 4,000 million
litre capacity summer reservoir.


Transportation is a huge issue in developing countries such
as India when large-scale projects are built near large cities.
The state government has built a four-lane road network
four kilometres long from Atchutapuram Junction to BIAC.
A nine-kilometre connection to national highways in the
vicinity is planned.


Park infraStructure


BIAC, an SPV, operates the park and has built the internal
infrastructure. The project is a Special Economic Zone and
large investments have been made. Security is provided
by a 9.5 kilometre perimeter boundary wall coupled with
7.2 kilometres of inner security patrol roads suitable for
containers with avenue walkways and storm water drains.


The park has a 33 KW power distribution system, street
lighting and perimeter security lights. Because the water
from the state government is untreated, BIAC is constructing
a 60 million litres per day water treatment facility, of which
20 million litres per day has been commissioned. BIAC has
also constructed a rainwater-harvesting pond as an integral
part of its commitment to environmental sustainability. Other
infrastructure includes a 56 million litres per day effluent
treatment facility, 250 million litres per day guard ponds
or reservoirs for the collection of effluents, a 9 kilometre
pipeline to carry treated effluent and a facility for solid waste
management.


BIAC has constructed a 35,000 square foot factory complex,
a 3,500 square foot fire services centre and a 6,000 square
foot main reception entrance for park security, logistics
support and customs services. A 155,000 square foot
centralized services complex encompassing commercial
services and administrative buildings, a restaurant, a food
court, and residences (including hostels) have been built.
For strong connectivity with global markets, BIAC provides
voice, data connectivity and WiMax facilities for business
units in the complex.


concluSion


Large-scale industrial parks are best achieved through a
joint venture of government clusters that have financial stake
in the clusters. This public-private partnership model proved
sustainable because responsibility for maintaining common
facilities rests with the enterprises themselves through the
payment of user charges.


a rePlicable model


The clusters set up under the SITP are noteworthy because
both public and private actors worked together to provide
world-class facilities for the textiles sector. The initiative for
developing the SITP came from the federal government.
The roles of all participants were clearly spelled out and the
public-private partnership produced the desired results.


The basic steps for replicating this model are as follows.


ƒ The central government creates the initial plan for
developing the textile parks with clear policies for
implementation and funding.




CHAPTER V – CREATING INTEGRATED TExTILE PARKS IN INDIA 101


ƒ The central government identifies a project management
consultant to execute the project under the Government’s
supervision with clear terms of reference.


ƒ State or provincial governments should be fully involved
because their residents will be the main beneficiaries.
State or provincial governments should invest in
developing the land and improving transportation
connectivity.


ƒ Involve private sector companies that are investing in
the project and the artisans as partners. This will then
ensure active participation in lawmaking, enforcement
and commercial in the park.


ƒ Connect the park to global markets to drive expansion.


India’s integrated textile parks have only been in operation
for a few years. However, given the response from industry
and governments participating in these ventures, the
sustainability of the parks look certain.


endnoteS
1. Information obtained from Confederation of Indian Textile Industry (CITI).


2. Financial closure is defined as the existence of a legally binding
commitment of equity holders or debt financiers to provide or mobilize
funding for the project. Source: World Bank.






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