Evelyn S. Devadason Thirunaukarasu Subramaniam

1. 37th FAEA Conference: Towards Inclusive ASEAN Economic Growth Manila, Philippines 28-29 November 2012 International Capital Inflows and Labour Immigration: A Heterogeneous Panel Application in Malaysian Manufacturing Industries Evelyn S. Devadason Thirunaukarasu Subramaniam

2. Defining Issues • 1980s: in-migration permitted to sustain labour market demands and maintain Malaysia as a favourable manufacturing site to foreign investors. • Largely courting vertical FDI inflows to the manufacturing sector on the back of cheaper production factors, mainly that of unskilled migrants (see also Vogiatzoglou, 2007). • Manufacturing is the largest employer of unskilled migrants and accounts for the largest share of FDI inflows – sector’s continued involvement in assembly-line production and medium-level value-added activities (Noor, 2007; Athukorala and Wagle, 2011).

3. Contd. • Historical trends suggest the presence of subtle linkages and feedback effects between the availability of foreign capital in the form of inward FDI and an elastic supply of unskilled workers - issue remains relatively unexplored in the Malaysian case. • Question whether “capital chases labor” or “labor chases capital” has not been solved, in part because it is likely that both phenomena exist simultaneously. (Clarke and Smith, 1996; Hatton, 2006)

4. Contd. • Unlike that of previous studies, bilateral (source-host) dimension not relevant for examining FDI-immigration links from the Malaysian perspective. • Adds to the body of literature on international factor mobility by focusing on inflows (same direction) of capital (FDI) and labour inflows (unskilled immigrants) and tries to understand whether the linkages may prevail from the perspective of a high immigration economy.

5. Key Issues Are the stocks of unskilled migrants an important location advantage (pull factor) for FDI inflows to Malaysia? What are the causal effects between FDI inflows and unskilled immigration?

6. Inward FDI and Unskilled Migrant Inflows, 1985-2009 FDI FWus • Share of FDI in total capital investment in manufacturing increased from 17% to 72% between 1985 and 2009, while the share of unskilled migrants in total unskilled employment increased from 2% to 38%. • FDI inflows seem to coincide with increased immigration.

7. Distribution and Importance of Foreign Capital and Foreign Workers, 2009 (%) • Distribution of FDI and unskilled migrant inflows is heavily skewed across industries. • Foreign presence is high within most industries (in terms of capital and unskilled employment shares).

8. Methodology Theoretical Exposition • Efficiency-seeking FDI in developing countries tends to be vertically integrated (Dunning, 1998) - relevance and importance of traditional determinants of FDI increasingly debatable. • Location determinants of FDI entrenched in 3 theories: • OLI (Dunning, 1993; 1998) paradigm (infrastructure, human capital, economic stability, production costs); • Institutional approach (corruption, political instability, institutional quality, financial and fiscal incentives); • New trade theory or NTT (market size, market growth, openness of the economy, factor endowments) (Markusen, 2002).

9. Contd. • Pull factors drive FDI inflows to Malaysia (Tham, 2011). • Empirical literature on FDI inflows confined largely to national-level factors; labour market related locational advantages focused on human capital (skill levels, educational levels, literacy rates) and production costs (labour productivity, labour costs). (Wong, 2005; Ang, 2008; Choong and Lam, 2010; Tan, 2010; Athukorala and Wagle, 2011; Noor and Fleming, 2012) • Large presence of unskilled migrants, an intrinsic characteristic (based on NTT that includes factor endowments) of Malaysia, seems to be largely ignored when explaining FDI inflows, particularly so when the siting of US and Japanese MNCs in this sector are partly based on the comparative resource endowments of their home countries.

10. Contd. Model Specification FDIit = αi + δit + γ1iFWus + γ2iGVAit + γ3iEIit + γ4iCR4 + εit FDI = share of foreign investment in total capital investment FWus = share of unskilled migrants in total unskilled employment (factor endowment) GVA = growth in real value added (market demand) EI = share of exports in total output (openness) CR4 = 4-plant concentration ratio (market power)

11. Contd. Empirical Strategy • Panel unit root tests (LLC, 2002; IPS, 2003). • Panel cointegration test (Pedroni,1999; 2004). • Between-dimension fully modified least squares (FMOLS) technique (Pedroni, 2000; 2001; see also Kao and Chiang, 2000). • Engle and Granger (1987) two-step procedure.

12. Contd. Data • Unpublished returns of Industrial Surveys. • Multivariate analysis (2000-2009). • Univariate analysis – 3 periods: • Full sample (1985-2009) – 575 observations; • First sub-period (1985-1999) – 345 observations; and • Second sub-period (2000-2009) – 230 observations.

13. Results & Discussion • Industries with high output growth do not draw in FDI -aim of MNCs engaged in the vertical-type FDI is not to capture increased market shares (see also Nunnenkamp, 2001). • Export-oriented industries attract FDI (see also Ang, 2008; Choong and Lam, 2010). • Lock-in created by established market shares pose barriers to FDI (see Athukorala and Wagle, 2011; Jensen and Kara, 2011; on the presence of government linked companies, the dualistic investment regime and the oligarchic nature of many industries that constrain MNCs entry in specific sectors).

14. Panel Cointegration Estimation (FMOLS Long-Run Estimates) Multivariate Framework 2000-2009 FDI = -0.083 +0.108FWus -0.059GVA*** +0.283EI*** -0.114CR4*** (-0.203) (0.388) (-7.395) (9.559) (-3.271) _________________________________________________________ Univariate Approach 2000-2009 FDI = -0.081 +0.108FWus (-0.099) (1.231) 1985-2009 FDI = +0.020 +0.369FWus*** (0.030) (4.397) 1985-1999 FDI = -0.087 +0.731FWus*** (-0.105) (4.427)

15. Contd. • Positive determining role of unskilled foreign workers on inward FDI appears to be emerging secondary (insignificant) with the passage of time. • Short-run bidirectional causality between unskilled foreign worker presence and inward FDI for the period 1985-1999. • For the overall period, 1985-2009, there is short- and long-run unidirectional causality from inward FDI to unskilled foreign worker presence.

16. Panel Granger Causality Results (Short-Run)

17. Contd. • Overall, evidence supports the view that unskilled immigrants are an important location determinant for inward FDI and that the inflow of FDI Granger-causes the inflow of unskilled foreign workers (labour chases capital). • Importance of unskilled migrants for inward FDI and the patterns of interdependence between unskilled migrants and inward FDI have changed over time. • Two counterfactual questions to the above results are: • Would the Malaysian manufacturing sector have received less capital flows had it received fewer unskilled immigrants? • Would upskilling of the Malaysian manufacturing sector been realized had there been more selective inflows of FDI?

18. Policy Implications • Offers support for the new direction in Malaysian policies to curb dependence on unskilled migrants by focusing on FDI inflows in higher-value-added (or quality-based). • Apparent waning of Malaysia’s attractiveness to MNCs (Athukorala and Wagle, 2011; Jensen and Kara, 2011) require policy coordination between regulating inflows of foreign capital and foreign labour - implemented policies do not pull in different directions and undermine Malaysia’s overall attractiveness as a destination for FDI.

19. Thank You