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THE STUDY OF STRUCTURAL EFFECT ON EXPORT COMPETITIVENESS
IN MALAYSIAN ELECTRICAL AND ELECTRONIC (E&E) SECTOR
UNIVERSITI PENYELIDIKAN, PEMBANGUNAN DAN PENGKOMERSILAN
UNIVERSITI TEKNOLOGI MARA
40450 SHAH ALAM, SELANGOR
MALAYSIA
DISEDIAKAN OLEH:
HASLINA BINTI CHE YAACOB
DR. NIK MAHERAN BINTI NIK MUHAMMAD
ZURINA BINTI ISMAIL
OKTOBER 2007
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Surat KamiTarikh
600-IRDC/SSP 5/3/137720 Disember 2004
UNiVERsrn TEKNOLOGI MARAInstitut Penyelidikan, Pembangunan danPengkomersilan (IRDC)
Institute of Research, Development andCommercialisation (IRDC)(Sebelum ini dikenali sebagm Biro Penyelidikan dan Perundingan)
40450 Shah Alam, MalaysiaWebsite : h ttp/ /: wwwruitm.edu.my/brc
Pengarah
UiTM Cawangan KelantanKampus MachangBukit llmu18500 MachangKelantan
Tuan/ Puan
PERLANTIKAN BAGI MENJALANKAN PENYELIDIKAN
Merujuk kepada perkara di atas, bersama-sama ini dimajukan salinan surat kelulusan
menjalankan penyelidikan serta ringkasan kos perbelanjaan bagi penyelidikan yangdijalankan oleh pensyarah dari UiTM Cawangan Kelantan ;
Tajuk Projek The Study of Structural on Export Competitiveness inMalaysian Electrical and Electronic (E&E) Sector.
Ketua Projek : Puan Haslina Yaacob
Kos Yang diluluskan : RM 19,880.41
Jenis Geran : Geran Dalaman
Sekian, terima kasih.
Yang benar f
KS-
PROF IUIADYA DR ROSMIMAH RUOHD ROSLIN
Ketua Penyelidikan (Sains Sosial dan Pengurusan)
s.k: 1. Prof Madya Napisah Hj SafiiKoordinator URDCUiTM Cawangan Kelantan
8. Puan Haslina YaacobKetua ProjekUiTM Cawangan Kelantan ,
3. Encik Mohd Halil Marsuki
Penolong AkauntanUnit Kewangan Zon 17(SHa haniarkan geran pcnye!h':!:an hix;i projek ini ke Kimpus Cawangzi)
4
axb Canselor (Penyelidikan):hdtka n (Sains Sosial da n Pengurusan)
jlidiksji (Sains dan Teknologi)RSC
idingan (Kewangan)
03-55442094/5
03-55442097
03-55442091
03-55442760
03-55442090
Ketua PerundinganKerua PengkomersilanKetua Harta IntelekPenolong Pendaftar
Pegawai Sains
03-55442100
03-55442750
03-55442753
03-55447092
03-55442098
Pegawai Eksekutif
PejabatAm
FaxUnit Kewangan Zon 17Penolong Akauntan
03-55442057
03-55442093/2101
03-55442096
03-55443440
03-55442099
OKAS
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Tarikh : 31 Oktober 2007
No. fail Projek : 600-IRDC/SSP 5/3/1377
Penolong Naib Canselor (Penyelidikan)
Institut Penyelidikan, Pembangunan dan Pengkomersilan
Universiti Teknologi MAPvA
40450 Shah Alam
Ybg. Prof,
LAPORAN AKHIR PENYELIDIKAN "THE STUDY OF STRUCTURAL
EFFECT ON EXPORT COMPETITIVENESS IN MALAYSIAN ELECTRICAL
AND ELECTRONIC (E&E) SECTOR"
Merujuk kepada perkara di atas, bersama-sama ini disertakan 4 (empat) naskah Laporan
Akhir Penyelidikan bertajuk "The Study Of Structural Effect On Export
Competitiveness In Malaysian Electrical And Electronic (E&E) Sector" oleh kumpulan
Penyelidik dari Fakulti Pengurusan Perniagaan untuk makluman pihak tuan.
Sekian, terima kasih.
Yang benar
Ketua
Projek Penyelidikan.
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KUMPULAN PENYELIDIK
HASLINA BINTI CHE YAACOB
KETUA PENYELIDIK
DR. NIK MAHERAN BINTI NIK MUHAMMAD
Ahli Kumpulan
ZURINA BINTI ISMAIL
Ahli Kumpulan
^yi^^
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PENGHARGAAN
Setinggi-tinggi penghargaan dan terima kasih diucapkan kepada semua pihak yang terlibat
secara langsung dan tidak langsung bagi membolehkan penyelidikan ini disiapkan dengan
sempurna.
Di antaranya:
Dato' Professor Dr.Hussin @ Mohamed Ab. Rahman
(Pengarah Kampus UiTM Kelantan)
Prof. Madya Dr. Noormala Bt Amir Ishak
(Dekan Fakulti Pengurusan Perniagaan)
Nik Kamaruzaman bin Abdulatiff
(Koordinator Penyelidikan, Pembangunan dan Pengkomersilan UiTMKK)
Semua pensyarah yang telah memberikan kerjasama dan sokongan di dalam menjayakan
penyelidikan ini.
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TABLE OF CONTENTS
Letter of transmittal
Acknowledgement
Table of content
List of tablesList of figure
Abstract
Page
ii
iii
viiviii
ix
CHAPTER 1: INTRODUCTION
1.0 Introduction
1.1 Background of the Study
1.2 Term and definition.
1.3 Problem Statement
1.4 Objective of the Study
1.5 Research Questions
1.6 Significant of the Study
1
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8
8
11
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CHAPTER 2 : LITERATURE REVIEW
2.0 Introduction 13
2.1 Economic Theory 13
2.1.1 International Trade Theory And Comparative Advantage 14
2.1.2 Evaluating Competitiveness And Comparative Advantage 15
2.2 Competitiveness 17
2.3 Export Competitiveness in Malaysia 19
2.4 Export Competitiveness in the World Market 21
2.5 Measuring Competitiveness 24
2.6 Constant Market Share Model (CMS) 25
2.7 Revealed Comparative Advantage Model (RCA) 28
2.8 Conclusion 30
CHAPTER 3 : RESEARCH METHODOLOGY
3.0 Introduction 31
3.1 Method 31
3.1.1 Constant Market Share (CMS) 31
3.1.2 Conceptual Framework 35
3.1.3 The CMS Formula 35
3.1.4 Sensitivity Analysis 37
3.1.5 The RCA Model 38
3.2 Data 40
3.3 Conclusion 41
IV
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CHAPTER 4 : FINDING AND ANALYSIS
4.0 Introduction 43
4.1 Constant Market Share (CMS) 43
4.1.1 Change in Export Value 45
4.1.2 Structural Effect 45
4.1.3 Competitive Residual 47
4.1.4 Second Order Effect 48
4.1.5 Summary 49
4.2 Revealed Comparative Advantage (RCA) 50
4.2.1 Export Performance Ratio of SITC 776 (Semiconductor) 50
4.2.2 Export Performance Ratio of SITC 772 (electrical machinery, 60Apparatus, parts and necessary).
4.2.3 Export Performance Ratio Of SITC 764
(Telecommunication equipment) 68
4.2.4 Export Performance Ratio of SITC 759(Printed circuit board) 81
4.2.5 Export Performance Ratio of SITC 752
(Disk drivers, printers and PCs) 90
4.3 Conclusion 101
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CHAPTER 5: DISCUSSIONS
5.0 Introduction 104
5.1 Recapitulation of Major 105
5.2 Discussion 109
5.2.1 Constant Market Share ( CMS ) 109
5.2.2 Revealed Comparative Advantage (RCA) 113
5.3 Limitation of the Study 115
5.4 Implication 116
5.5 Recommendation 116
5.6 Conclusion 166
BIBLIOGRAPHY
APPENDICES
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Table Description Page
Table 1 Competitiveness Ranking For 2002 2002-2003 7
Table 2 Gross Export of E & E manufacture in Malaysia 10
Table 2.1 Desirable Characteristics on Competitiveness Measures and 25Methods
Table 4.1 Result of Yearly Decomposition of Change in Malaysia Export 44Value of E & E products
Table 4.2 Export Performance Ratio of 776 or Semiconductor (1990-2004) 50-57fable 4.3~~ Export Performance Ratio of SITC 772 60-66
fable 4.4 Export Performance Ratio of SITC 764 74-80
Table 4.5 Export Performance Ratio of SITC 759" 81-86
Table 4.6 Export Performance Ratio of SITC 752 90-96
fable 4.7 Market Position of E & E Product by Destination 102-103
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LIST OF FIGURES
Figure Description
Figure 1 E & E Products' Share of National Exports
Figure 3.1 Schematic Representation of the CMS model
Figure 3.2 The Framework of these Decomposition Item
Page
7
32
35
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Abstract
Malaysia is among the world's top 20 trading nations. This is due to the structural
change in the Malaysian economy that turned the country from an exporter of primarycommodities into an exporter of high value-added manufactured products. In
Malaysia, E&E forged a strong foundation over the 1 ast 3 decades, which provides
new opportunities for such investments. This study analyses the structural effect on
export competitiveness of Malaysian E&E products focusing on semiconductor (SITC
776), Telecommunication product (SITC 764), Electrical machinery, Apparatus, Part
and necessary (SITC 772), Printed Circuit Board (SITC 759) and Disk drives, printers
and PCs (SITC 752). Furthermore, the study uses the Constant market share (CMS)
and revealed comparative advantage (RCA) framework to analyze the extent of the
export competition between Malaysia and other competitor economies. Overall, CMS
result shows that in the first sub-period (1990-1994), Malaysia E&E export was
competitive in the four markets studied, namely USA, Singapore, Japan and Hong
Kong. However, in the second and third period, CMS result shows that Malaysia E&E
export increased but not due to market competitiveness but due to the structural effect
- that is due to an increased in the world import. In terms of export performance ratio,
RCA results show that, Malaysia E&E product only performed was highly in the US
market for almost all SITC. Indonesia has concurred the Singapore market and Hong
Kong was concurred by China. However, Malaysia E&E export to the world generally
has comparative advantage over other competitors namely Indonesia, Thailand and
China. The study also revealed that Malaysia has higher export capacity to other
countries besides USA, Singapore, Japan and Hong Kong. Therefore the argumentsaying that China will intensify the competitiveness of Malaysian E&E market is
questionable since the study cannot reveal the comparative advantage hold by China.
The study found that China only dominated the Hong Kong Market for almost all
SITC studied.
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CHAPTER 1
INTRODUCTION
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CHAPTER 1
INTRODUCTION
1.0 Introduction
The electrical and electronic (E&E) industry is the leading industry within the
manufacturing sector and is the largest contributor to output, export and employment
opportunities in Malaysia. In 2004, Malaysia's exports of E&E products worth was
RM241.48 billion (US$63.55 billion), which accounted for 50.2 per cent of total
Malaysia's exports or 64.1 per cent of Malaysia's total exports of manufactured
goods. Major export destinations were the US, Singapore, Hong Kong, Japan and
China. As one of the leading exporters of electronics products in the world, Malaysia
markets electronics components, consumer electronics and industrial electronics.
The biggest export item is semiconductor devices used in a diverse range of
industries, such as automotive and telecommunications. Malaysia's electrical
products c omprise of household appliances, wires and cables, electrical industrial
equipment, dry cells and batteries and other electrical apparatus and supplies
(Matrade, 2005).
1.0.1 Electrical Products
A sophisticated range of electrical appliances are manufactured in
Malaysia, including:
Refrigerators, washing machines, vacum cleaners, electric fans,
instant water heaters, rice cookers, blenders, microwave ovens and
room air-conditioners.
Wires and cables.
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Electrical industrial equipment such as switchgears.
Distribution transformers and electric motors.
Dry cells, automotive batteries, incandescent lamps and fluorescent
tubes.
Major brands include Panasonic, Sony, Philips and Samsung. Home
grown brands like T, 'Pensonic', 'Khind' and 'MEC have also made inroads
into the export markets.
1.0.2 Electronic Products
Made-in-Malaysia electronics products are diverse and fall into 3
categories - electronic components, consumer electronics and industrial
electronics. These goods are sold globally, with semiconductor devices
valued at RM89.30 billion (US$23.50 billion) accounting for more than 30 per
cent of total E&E exports for 2004.
Semiconductor devices produced include:
o linear and digital integrated circuits;
o memories and microprocessors;
o opto-electronics;
o discrete devices;
o hybrids;
o arrays; and
o high-reliability military products.
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Malaysia is among the world's top 20 trading nations. This is due to the
structural change in the Malaysian economy that turned the country from an exporter
of primary commodities into an exporter of high value-added manufactured products.
The most significant change came during the late 1980's when the share of the
manufacture exports doubled i n a s pan of five years (MITI: 2 002), particularly the
Electrical and electronic (E&E) industry.
Malaysia is now an export-oriented and it is a significant component of the
Malaysian Economy. Electrical and electronics products accounted for RM189.49
billion or 56.6 per cent of Malaysia's total exports and remained the largest
contributors in 2001 and in the year 2002, it saw an increase of 4.5%. The largest
export market for E&E products was the USA, valued at RM51 billion absorbing 26.9
per cent of the total electrical and electronic exports in 2001 and it increased to
RM55.66 (28.1 percent) in 2002. Other major export destinations were Singapore,
RM35.9 billion (19 per cent) in 2001 which increased to RM37.79 billion (19.1
percent) in 2002, Japan RM21.6 billion (11.4 per cent) in 2001 but decreased to RM
17.87 billion (9 percent) in 2002, Hong Kong, RM14.52 (7.3 percent) in 2002, the
Netherlands RM11.7 billion (6.2 per cent) in 2001 but decreased to RM8.75 billion
(4.4 percent) in 2002 and China RM8.62 billion (4.4%) in 2002. In 2003, export sector
in Malaysian E&E product made up to 52.9%.
E&E valued at RM 85.18 billion (US$22.42) billion accounting for more than
40% of total exports for 2003. In 2004, Malaysia's exports of E&E products was
worth RM241.48 billion (US$63.55 billion), which accounted for 50.2 per cent of total
Malaysia's exports or 64.1 per cent of Malaysia's total exports of manufactured goods
(Maltrade,2005)
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In Malaysia, E&E forged a strong foundation over the last 3 decades, which
provides new opportunities for such investments. Many companies found Malaysia a
competitive manufacturing, and export base nation, as they move up the
manufacturing value chain, and produce higher end and high value added products.
This is reflected in the continuing interest amongst investors, to establish new
manufacturing operations in the E&E sector, as well as to expand and diversify
existing operations in Malaysia
For the period of 2000 to August 2003, 313 E&E projects were approved by
the Malaysian government, encountered for RM 8.6986 billion total investment
(67.8% foreign sources, that is RM5.9 billion, and 32.2% domestic sources, that is
RM2.7968 billion).
Within the electronics sector a lone, out of the 863 projects approved, with
total capital investment of RM37.4 billion, between 1998 - August 2003, 426 projects
were for the manufacture of electronic components, with the investment of RM25.5
billion 251 projects were in the industrial electronics sector, with the investment of
RM8.7 billion; and 186 projects were to manufacture consumer electronics products,
with the investment of RM3.2 billion. Total employment provided by the 863 projects
was 172,000.
Malaysia markets electronics components, consumer electronics and
industrial electronics to the world and the biggest export item is semiconductor
devices used in a diverse range of industries, such as automotive and
telecommunications.
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In the consumer electronic sub-sector, it is seen that companies have shifted
from the production of traditional products, such as VCRs, color TV sets, to higher
added value products, such as digital audio-video equipment, multimedia speakers,
TFT/Plasma TV sets and home theatres.
In the area of E&E research and development (R&D), the Malaysian
government continues to proactiveiy encourage the relevant R&D activities, through
both fiscal and non-fiscal incentives. For example, under the Economic Stimulus
Package announced on 21st May 2003, further incentives for R&D are provided, to
enhance R&D activities in the country which include:
1. approved R&D expenditure incurred during the Pioneer Status period, will
be allowed to be accumulated, and brought forward, and be given another
deduction after the Pioneer Status period;
2. expenditure on R&D activities undertaken overseas, including the training
of Malaysian staff, will be considered for double deduction, on a case-by-
case basis;
3. R&D companies will be given either second round Pioneer Status for
another 5 years or Investment Tax allowance for a further of 10 years; and
4. all value-added activities, including R&D will be designated as "prescribed
activities" that can be undertaken in free industrial zones or licensed
manufacturing warehouse.
With the realization of AFTA since January 2003, the ASEAN market should
provide new opportunities for companies operating in Malaysia. For widely traded
products, such as those in the E&E sector, this is supposed to be on-going efforts to
spur the growth of a pan-ASEAN market.
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At present, ASEAN has already completed the harmonization of standards
for 20 priority product groups, which are widely traded in ASEAN, and which conform
to 59 international standards of the ISO and the International Electro-technical
Commission or I EC. Out of the 20-product group, 18 are in the Electrical and
Electronic sector, ranging from refrigerators, air conditioners, television sets,
capacitors to cathode ray tubes and loudspeakers and parts. The harmonization of
these product standards, and the conformity to international standards, will facilitate
greater intra-ASEAN market access, as well as access into the global market.
However, China's robust economic growth and strong gravitational pull offoreign direct investments have been a serious threat to ASEAN countries,
particularly to those countries which are highly dependent on the E&E sector for their
export revenue (figure 2). However, although China's thriving semiconductor industry
has been fuelled by its costs competitiveness; most MNCs are not in a hurry to invest
in China. This is due to some distinct problems that have prevented them from
making a premature leap on the Chinese bandwagon. China has a lack of qualitative
factor such as conducive business environment, efficient infrastructure, and a sound-
banking sector.
China's burgeoning chip sector also appears to be a growing threat to
Malaysia. A study by the World Economic forum has indicated otherwise. The report
evaluates the economic competitiveness of a large sample of 102 countries in terms
of growth, business environment and technology. However, Malaysia's
competitiveness in 2002 and 2003 surpassed that of China and other ASEAN
countries (except Singapore). This is due to China's poorer ranking and perceived
deterioration related to its quality of public institutions, i.e. concerns about red tape,
corruption, judicial independent, trade barriers and banking system (Global
Competitiveness Report, World Economic Forum, 2003)
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Figure 1: E&E Products' Share Of National Exports
Malaysia - 53%
Singapore -6 4%
Sources: Asian Development Bank And Central Banks Of Various Countries
TABLE 1: COMPETITIVENESS RANKINGS FOR 2002 AND 2003
Gotiti^ v
MalaysiaThailandChinaPhilippinesIndonesia
200230373863
69
.. -
. . :
. . -.' :
2932446672
Busin^nv i rn r
2002
26
35386164
^ w ,
2631466560
..__ Technoloyy
'009
26416352
65
2039655678
Note: Higher Rankings (I.E Smaller Numbers) Imply Better Competitive Position
1.1 Background of the Study
This study analyses the structural effect on export competitiveness of
Malaysian E&E products focusing on semiconductor (SITC 776), Telecommunication
product (SITC 764), Electrical Machinery, apparatus, parts and necessary (SITC
772), Printed Circuit Board (SITC 759) and Disk drives, printers and PCs (SITC 752).
Furthermore, the study uses the Constant market share and revealed comparative
advantage framework to analyse the extent of the export competition between
Malaysia and other World economies. It was argued that the emergence of other low
cost producers such as China and ASEAN Free Trade Area (AFTA) will intensify the
competitiveness of Malaysian E&E market.
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Many studies have assessed the competitiveness of Malaysian commodity
exports, namely Palm Oil (Fatimah and Roslan, 1988, Mohamad, Fatimah, Abdul
Aziz, 1992), Cocoa and rubber (Md Nasir, Mohd Ghazali, Othman, 1993). Amir
(2000) on the other hand provides in-depth research on competitiveness of all
Malaysian manufacturing and factors that influence Malaysia's export
competitiveness.
Fatimah and Alias (1997) study on export performance of selected E&E
products, which is similar to this study. The present study however, extend the
research area by comparing the performance of Malaysia E&E market and their
competitiveness with three other countries namely Indonesia, Thailand and China
from the year 1990 to 2004. Even though a country's competitiveness is affected by
both price and non-price factors (e.g. product, quality, delivery service, business
environment and technology) this study has focused on identifying m easures and
determinants of Malaysian competitiveness in specific E &E s ector using Constant
Market Share (CMS) approach and Revealed Comparative Advantage (RCA)
approach. CMS decomposes of four components of actual growth of country's
exports: namely world trade, commodity composition, market distribution and
(residual) competitiveness. CMS identifies factors that contribute to the export gain
or loss in the world market - structural and competitiveness and the RCA analysis
provides a rough indicator of the strength of a product in terms of its comparative
advantage in the world export market relative to others (Fatimah and Alias, 1997).
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1.2 Terms And Definition
"Competitiveness" in this study was defined as any changes in the export
value measured by only microeconomic factor such as price factor (i.e cost of the
product).
"Specialization" was defined as producing a product which has a niche
market and high value added.
1.3 Problem Statement
The Malaysian economy has experienced a rapid economic growth during the
past three decades. The manufacturing sector has played a decisive role in
Malaysian economic success, contributing significantly to output, investment,
employment, and exports. Although the export sector particularly E&E has been at
the forefront in transforming the Malaysian economy, it has also made the country
highly dependent on the buoyancy of the external sector such as those mentioned
above.
The E&E sector as a major contributor to Malaysian export and accounting for
more than half of the country's export revenue has been sliding since the tech
meltdown in 2000. The past two decades or so have s een s ubstantial changing
patterns of export share and export merchandise in Malaysia. There is a very strong
belief that fast-growing China is overtaking the ASEAN-2 countries, in international
trade arena especially with the accession to the WTO of China. ASEAN particularly
Malaysia is facing the challenge of a rapidly industrializing China, not only China's
flooding its low-priced manufactured products, but competing indirectly in a third
country market, which is a more serious treat to ASEAN (Wong, 1984 in Wen, 2001).
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The local E&E industry has shown mixed performance across its various sub-
sector (table 1) while exports of lower-end product suffered declines. Even though
semiconductor sales had instead strengthened in 2003, amid the increasingly keen
competition and pressure to cut costs, Multinational Corporations (MNCs) are shifting
their manufacturing bases to lower-cost countries, mainly China. Declining exports
has also been more pronounced for labor-intensive and lower-value-added products
that is the most vulnerable to competition from China, such as television, air-
conditioners, electrical apparatus and refrigerators. The cost skilled labor in Malaysia
is estimated to be 2 times more expensive than in China (Ram 2003).
Table 2: Gross Exports 01Exports
Semiconductors
Electronic components andparts
Industrial equipment &machinery
Electrical appliances(consumer product)Total E&E exports
Share of total export (%)
E&E Manufacuturers In IV2000
(RM mil)
71,16995,662
36,182
26,463
229,476
62%
2001
(RM mil)
60,774
79,082
35,980
24,714
200,550
60%
alaysia.2002
(RM mil)
72,522
81,742
32,315
22,482
209,061
59%
2003
(RM mil)
77,985
69,196
33,465
21,810
202,456
53%
Increase
Decrease
Decrease
Decrease
Decrease
decrease
Sources: DOS
China's robust economic growth and strong gravitational pull of foreign direct
investments have been serious threats to ASEAN countries, particularly those which
are highly dependent on the E&E sector for their export revenue (figure 1). Does this
then imply doom and gloom for Malaysia?
Therefore, this study is interested to investigate the performance of Malaysian
E&E exports and their competitiveness as compared to other competitors.
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1.4 Objective Of The Study
The objective of the study is:
1. To analyze the market share of Malaysia E&E exports using constant
Market Share (CMS) approach in order to assess its competitiveness in
the world market.
2. To identify the Malaysian competitive position in E&E exports to the world
market from 1990-2004.
3. To examine whether the decline in Malaysia E&E export performance
over 1990 -2004 is associated with the decline in Malaysian
Competitiveness.
1.5 Research Questions
Based on the above problem statement and research objectives, the basic questions
that need to be addressed here are:
1. Does Malaysia E&E product have the comparative advantage in the world
market?
2. How competitive are these exports?
3. As compared to the selected countries, which competitive position
Malaysia is in E&E export, to the world market from 1990-2004?
4. Is the decline in Malaysia E&E export performance over 1990 -2004 is
associated with the decline in Malaysian Competitiveness?
5. Where are the potential markets for these products?
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