During World War 2, natives in the remote South Pacific islands first made contact with the outside world following the arrival of the American armed forces. They also flew in wonderful goods from the developed world. However, with their subsequent departure that marked the end of the war, the natives no longer enjoyed such luxuries.
Out of desperation, they sought to duplicate the elaborate American airbases through which they obtained their precious cargo. The replicas included an elaborate wooden runway, furnished with a small hut that served as a control tower.
The natives religiously carried out their air traffic duties, hoping for the planes to return, but their efforts were clearly in vain.
This fallacy — cargo cult science, popularised by the Nobel laureate in physics Richard Feynman — highlights the weakness of pseudosciences which, more often than not, take the outward form of science but actually lacks the substance of “science-ness”.
While the economics discipline is subjected to scrutiny and rigour, the same cannot be said of our policymakers — even those with the best intentions. By copy-pasting other countries’ economic policies in order to achieve a comparable outcome, they may inadvertently emulate the South Pacific Islanders in their cargo cult practices.
This post hoc fallacy — since event Y followed event X, therefore X must have caused Y — gives the false impression of causality when there is actually none. It is akin to saying: since the rooster crowed immediately before sunrise, therefore, it can be concluded that the rooster caused the sun to rise.
Likewise, just because countries A and B achieved their high statuses by appearing to had undertaken X, Y and then Z, Malaysia is then assured a similar outcome when these methods are pursued.
Malaysia’s admirable economic development followed closely in the footsteps of Japan and the Asian tigers. From an agrarian and resource-based economy, Malaysia went through leaps in economic growth as a result of rapid industrialisation, hinged on the promotion of FDI-led export-oriented manufacturing and large-scale, capital-intensive heavy industries.
While the performances of these heavy industries have declined, the export-intensive industries have remained relatively competitive. The foreigner-led manufacturing have played a catalytic role in developing Malaysia's manufacturing landscape, adding much resilience and diversification to our exports as well as further integration into the global production networks.
However, discussions on our dependency on foreign investment, especially on its role of moving Malaysia into the high-income bracket, have been far and few between. Foreign investments were a boon to Malaysia’s early stages of development, but they may end up as its pitfall if they are excessively relied upon.
Our Japanese and East Asian tiger counterparts were successful in moving away from reliance on foreign investment to sustainable indigenous industrialisation. However, the opposite appears to be taking hold in our economy today, despite having pursued similar industrialisation strategies.
Thus, a careful scrutiny of prior tried-and-tested methods is in order, less we find ourselves subjected to this post hoc fallacy as how the South Pacific Islanders were.
The symptoms of such excessive reliance of foreign investments can be elicited from four types of foreign dominances in the Malaysian economy.
FIRSTLY, market dominance — The dominance of foreign multinationals has crowded out the development of indigenous SMEs. Local statistics showed that the share of foreign MNCs in the electric and electronic (E&E) sectors has been increasing, contributing almost two-thirds to investments and gross domestic product in the respective sectors.
SECONDLY, innovation dominance — Indigenous innovation is hampered by a double whammy of high foreign patent ownership of more than 95 per cent in Malaysia and little technological transfer to local suppliers.
Foreign firms’ position on the domestic innovation frontier remains firmly in place, yet little is done in building the domestic innovative capacities and facilitating technological spillovers or upgrading among local suppliers.
THIRDLY, procurement dominance — Based on the latest Trade in Value Added (TiVA) database by OECD, Malaysian E&E exports have a high foreign content share of 65 per cent, the third highest among the 60 countries surveyed. This limited tie-ups contributed little in integrating domestic suppliers into the global value chains.
LASTLY, bargaining power dominance — Malaysia has been losing its early mover advantage in attracting foreign manufacturing investments due to the catching up of newer and more cost competitive emerging economies. Thus, the bargaining power of foreign MNCs continues to solidify even as Malaysia’s attractiveness as a manufacturing hub wanes.
As a result, the government will need to extend even more generous tax incentives and concessions in order to ensure the continued establishment and expansion of foreign MNC activities on Malaysian shores.
As more and more resources are allocated to this cause, a vicious cycle is created which enhances the dominant position of foreign MNCs while depriving the already handicapped local SMEs.
Addressing these imbalances is crucial in determining the nation’s progress towards its high-income nation status.
Justin H is an independent researcher