Malaysia-Korea Economic Relations: Trends and Developments
| Norma Mansor | |
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| Name in Latin Alphabet: | Norma Mansor |
|---|---|
| Nationality: | Malaysia |
| Affiliation: | Professor/Director. Social Security Research Centre (SSRC) Faculty of Economics and Administration University of Malaya |
목차
Introduction
Petronas Twin Tower and Penang Bridge are among the most recognizable landmarks in Malaysia. These famous architectural sites are also seen as symbol of cooperation between Malaysia and Korea as firms from both nations were responsible in the construction of these projects. Korea is not only one of the biggest foreign investor in Malaysia, but also an important trading partner of the country. This increasing interdependence partnership is largely a response to the structural transformation of their respective domestic economies and policy revisions, coupled with the need to seek a strategic partner in the era of globalization and open economy.
Former Malaysian Prime Minister, Dr. Mahathir Mohamad introduced the ‘Look East Policy’ in the early 1980s, as a way to learn and benefit from the success of Japan and South Korea. Following the policy establishment, economic relations between Malaysia and Korea has since developed and grown as important cooperation partners in various fields. The involvement of Malaysia and Korea as ASEAN+ 3 member countries also intensifies the partnership between the two.
In 2013, Korea is the seventh largest trading partner, contributing up to 3.8 % of Malaysia’s total trade volume (Malaysia External Trade Corporation, 2013).Presently the bilateral trade and investment relationships between the two countries is averaging US$ 11 billion every year (Central Bank of Malaysia, 2014). Education and training exchange also plays a vital role in improving the bilateral ties between Malaysia and Korea. Indeed, further enhancement of the relationship between the two nations would certainly result in a mutually favourable partnership that would ensure sustainable economic development in the future.
Malaysia and Korea Economic Relations
Malaysia and Korea have enjoyed cordial and cooperative relations for decades after the first official diplomatic relationship were normalized in the 1960s. However, the initial movement to work on forming bilateral ties between the two countries had begun before Malaysia achieved independence. In 1954, a series of visitations were made by Korean envoys to Malaya then in order to convey their intentions in building a relationship and cooperative ties with Malaya and other Asian countries. Nonetheless, due to domestic political problems in Korea, any progress made to formed diplomatic ties were stalled for several years. The official diplomatic relationship between Korea and Malaya was only formally signed on 23 February 1960. In 1962, a trade agreement was ratified and that opened up new opportunities for both nations with the establishment of bilateral trade.
The first twenty years of diplomatic partnership between Malaysia and Korea can be described as unremarkable and low key in nature (Lee & Lee, 1997). Trade and cultural exchange were very limited. This was to be expected as both countries were still undergoing formative development, and Korea in particular, were still facing internal political instabilities and the aftermath of Korean Wars. Furthermore, Korea’s foreign policy at the time inhibit progress of diplomatic ties with other ASEAN countries (Tan, 2006). Thus, the early establishment of bilateral trade agreement between Malaysia did not lead to immediate and significant changes.
This soon change after Chun Doo-hwan took the helm as the new Korean President after the demise of Park Chung-hee in 1980. Under Chun’s administration, the country underwent several structural changes in relation to its economic and foreign policy to solve the country’s problem of high unemployment rates and declining exports. He was keen to move out of the country’s heavy reliance on traditional trading partners such as Japan and U.S. and focused on emphasizing the necessity to develop a complementary economic relationship. The Southeast Asia countries were identified as the new strategic business partners, where the region can be characterized by large accessible market, low labour cost and most importantly abundance of raw materials.
Being a resource-poor nation, Korea had to import its raw materials requirements to support its ever growing manufacturing industry such as textile, electronic, petrochemical, etc. The Southeast Asia countries like Malaysia, Thailand and Indonesia are able to meet not only the industrial needs of Korea, but they also serve as an attractive destination for the investors. In exchange of minerals resources, timber, energy, Korea supplies advance technology, machinery and capital to these developing countries.
Likewise, Malaysia also experienced a paradigm shift in leadership when Prime Minister Mahathir Mohamad came to power in the early 1980s. Under his administration, major policy reforms were undertaken to promote economic growth and development based on outwardlooking strategies. One of the most impactful policies towards overseas trade and economic links that were introduced during the period was the ‘Look East Policy’. Dr. Mahathir was impressed by the growth and economic development of the East Asian countries, particularly Japan and Korea. He was keen to have these two countries serve as models for Malaysia to emulate such that most of the policies under Mahathir’s administration were formulated based on the successful cases of Japan and Korea. For example, Malaysia’s Industrial Master Plan (1986-1995) was spearheaded by a Korean consultant and modelled along the Korean industrial plan (Kanapathy, 1995).
The initiation of the Look East Policy has catapulted Malaysia’s relation with Korea to a new level. Malaysia, then a major producer and exporter of primary commodities, thus readily became one of Korea’s key suppliers of raw materials and trading partner. Efforts were taken to increase trade and investment with Korea. In particular, preference was given to firms from Japan and Korea in the award of contracts for major projects in Malaysia. Through this cooperative projects, advance technology and knowledge from Korea and Japan were transferred and shared. To further enhance the ties between Malaysia and Korea, Dr Mahathir made an official visit to Korea and met Chun in 1983. Chun was enticed with the idea presented in the Look East Policy and was determined to give his full support to the policy (Zamhuri, 2001).
Since then, numerous working committees were formed, such as trade, technical and education committees to increase the interaction between the two nations. Aside from this, multilateral cooperation between ASEAN member countries also improved. As a member of ASEAN, Malaysia, in July 1991 was a staunch supporter for Korea to be dialogue partner in ASEAN. It is evident that after the policy reforms in their respective countries, trade, investment and sociocultural links between Malaysia and Korea have assumed far greater importance.
Currently, Korea’s per capita income is more than triple that of Malaysia, and both countries enjoys high level of domestic savings. Based on their respective sectoral composition of GDP and export structure, it can be surmised that their industrial structures are complementary.
Korea’s strong economic performance combined with its high technological achievements relative to the other Newly Industrialized Economies (NIE) have made it a power house, with average economic growth of 8.6 percent since the 1960s. The country has adopted an outwardlooking economic strategy to fuel its economy. Between the 1960s and 70s, Korea pursued an aggressive export-oriented policy, which laid the foundation for the country’s rapid growth and technological advancement.
Malaysia, on the other hand, had been growing at a relatively slower pace during the 70s and 80s. Its economic success is to a large extent attributed to its liberal outward-oriented strategies. External sector, apart from foreign exchange earnings, are among the important source of capital and technological inputs. The country also benefited from economic deregulation and policy revision in the 80s to open up the economy and promote rapid growth.
Trade Relation
Trade relation between Malaysia and Korea grows stronger for the past three decades following impressive economic performance in both countries. Earliest statistical data available on business relation between the two nations suggest that it began rather modestly with the involvement of Korean traders in the timber and logging industry. Several Korean companies were listed in Miri, Sabah to export logs to Korea. Some of the firms later shifted their focus to Peninsula Malaysia while others expand their existing business into furniture-making industry. In 1963, Korea exports to Malaysia amounted to US$ 755,000, which was a mere 0.8 percent of its overall exports volume, consisted of textile, agriculture and marine products. Conversely, Malaysia’s main exports to Korea during the same period were valued at US$ 4.7 mil, consisted of mostly raw materials like timber, rubber, coconut and tin.
After the establishment of the Look East Policy and progressive economic development in both countries, Malaysia began to register a growing trade surplus with Korea, reaching close to US$ 60 million in the late 1980s. One of the contributing factors for the persistent trade surplus is due to huge demand for raw materials by Korea, whereas Malaysia’s import from Korea has remained small, but growing. Malaysia’s import from Korea surpassed its export volume from 1994 to 2000 due to increasing demand for Korea’s manufacturing products (Refer to Figure 1). Due to the surge of imports by Malaysia, trade balance began to decline in the early 90s. Import volume started to decline with the occurrence of Asian Financial Crisis in 1997 that led to significant drop in both export and import volumes. The trade balance also suffered due to larger import volumes compared to exports. The situation improved in 2000 and the trend continued until the world’s economy was hit with another crisis in 2008. After recovery, export to Korea continues to grow on a steady path and trade surplus has continued to improve until today, thus highlighting the long-term trade growth prospects between the two countries.
Before 1991, Korea was nowhere in the list of the ten largest Malaysia’s trading partners. Since then, as bilateral trade between the two countries improves, Korea became one of the key trading partner of Malaysia in terms of import and export. In 2013, Korea is Malaysia’s seventh largest trading partner, behind U.S., Thailand and Indonesia.
Korea was one of the major purchasers of Malaysia’s primary commodities such as crude petroleum, mineral fuels, wood, lumber, cork, pepper and crude rubber. While for Malaysia, it consisted mostly of manufactured goods, of which about 80 percent are clothing and textiles. It can be observed that the composition of export-import between the countries is complementary in nature. Over the last couple of decades, expansion in the volume of trade was accompanied with marginal changes in the trade structure (Refer to Table 4). Raw materials still constitute the majority of Malaysia’s import to Korea; however demand for manufacturing product by Korea has also increased.
This transition was partly contributed by the structural transformation in Malaysia from agricultural-oriented industry to manufacturing sector during the 60s and 70s. To support its industrialization drive, Malaysia import more intermediate capital goods from Korea. At the same time, Korea no longer depend on its labour-intensive light industry to produce lower value-added products such as textiles and footwear. The country shifted its focus on heavy industry such as electrical and electronic products, petrochemical, ship building and car manufacturing.
The other factor that contributed to the changing trading structure was the growth in foreign direct investment in Malaysia. Many multinational companies like Sony, Philips, Toshiba, Panasonic, Intel and more opened their factories in Malaysia. Korean companies like Samsung and LG too, established their own plants in Malaysia and exported their production outputs to Korea. Intra-trade of Korean firms was one of the biggest contributor to the bilateral trade between Malaysia and Korea (Tan, 2001). This situation changed and diversified the trade composition.
Malaysia-Korea Investment Links
The economic relation between Malaysia and Korea is not only limited to trade, but also in terms of investment. The availability of relatively low-cost and skilled labour in Malaysia has attracted foreign investment from Japan, Western European countries, and the NIEs. Furthermore, the government deregulation policy on foreign direct investment (FDI) and its commitment to outward-oriented policies, pro-private sector support, large scale privatization programme, the strengthening of regional economic integration through the ASEAN network, bilateral trade agreements have all made Malaysia a very attractive destination for foreign investors, including Korea.
In the late 1980s, most of Korea’s investment were channelled to ASEAN. Its manufacturing investment accounted for 25.7 percent and 25.3 percent of its total overseas manufacturing investment (Park, 2015). One of the reasons for this was due to competitive labour costs compared to Korea. During its early industrialization drive in the 1980s, Korea’s labour costs were relatively lower than the international standard due to government suppression of the labour movement. As such, Korean manufacturers did not find the need to pursue investment in countries with lower labour cost. However, Korea’s industrial workers began to demand for increased wages and improved working conditions. Korea’s labour intensive light industries then experienced declining competitiveness, and its exports volume suffered as a result. The manufacturers began to migrate en masse to ASEAN countries like Indonesia, Thailand and Malaysia.
Indonesia was the preferred location for the production bases of footwear and clothing industries due to its abundant cheap labour. Malaysia and Thailand on the other hand were chosen for its electronic production, as the countries had better supporting industries and skilled workers for assembly of electronics (Park, 2015).
The first recorded Korean investment to Malaysia was in 1973, by Hanjin Construction and four years later by Daewoo Cooperation. The level of investment until 2001 was relatively modest and fluctuated marginally, averaging around US$ 34 million per annum. The invested amount was considerably lagging behind other investors like Taiwan and Hong Kong in the same period. In 2003, the investment increased marginally by 4.8 percent from US$ 14 million to US$ 82.7 million of the previous year and continue to increase in 2004 before declining again (Refer to Figure 3). Investment from Korea reached its peak in 2010 and amounted to US$ 1.54 billion (Central Bank of Malaysia, 2015). However the figure dipped the following year and continues its downward trend until now. As of 2015, the net accumulated investment made by Korea to Malaysia is around US$ 4.56 billion, (Korea EximBank, 2015). It is expected that Malaysia will remain as one of the major destination for Korean investment firms.
Majority of Korean chaebol companies have at least one investment project in Malaysia, which includes Samsung Group, LG, Hyundai, SsangYong, Daewoo and KISWIRE. Other smaller and medium scale enterprises like Sung Jin Motor, Samsung Medical Rubber, Young Rheem Electronics, Henikwon Corporation and others have also invested in Malaysia.
In the case of Malaysia, the investment level to Korea between 1991 to 2006 was almost negligible, averaging about US$ 9.2 million a year (Refer Figure 3). The investment level started to rise in the following years, particularly in 2008, where the investment increased almost 38 times from US$ 7 million in 2007 to US$267.3 million. As Malaysia’s economy matures and develops, more Malaysian firms are now expanding and branching out their businesses abroad. Among the companies that have achieved foothold in Korea are Berjaya Land, CIMB Group, eCosway Global, Boston F&B, Malaysia Airlines and Triways. Many of the Malaysian companies are involved in property development, financial activities, retailing, and hospitality business including restaurant and the airline industry, with investments amounting to US$ 2.47 billion. Majority of the investment is in property development. The Berjaya Group was involved in a project to develop a 74.38ha land for self-sustaining, integrated and high-end resort development, worth around US$ 2.4 billion. The project was the largest single foreign investment in Korea’s tourism industry.
In 2014, foreign investment in Malaysia consisted of 27.6 % of its total investment, and 70 % of the FDI came from Asian countries. Korea is the fifth largest source of FDI in manufacturing projects (Refer Figure 4). Most of the Korean firms invested in capital and technology industry.
Korea’s investment in Malaysia during the early years was predominantly in resource-based industries such as non-metallic mineral products, wooden and wood-based products, and furniture and fixtures. The bulk of it has also taken the form of 100 percent foreign equity or majority foreign ownership. This may have stemmed from Malaysia’s bias export promotion investment policy guidelines which call for local ownership for projects that are domestic market oriented (Kanapathy, 1995).
Among the biggest investment amount from 1973 – 1989 was for cement mixing by DOOSAN Heavy Industry with net accumulative investment worth US$ 24 million. This project was a collaborative effort with a local Malaysian company, and thus was named as Perak-Hanjoong Simen Sdn. Bhd (Tan, 2006). In 2010, one of the major investment project by Korea was from Honam Petrochemical Corp, which has invested a total of RM 8.69 billion (US$ 2.63 billion) in the petrochemical industry to produce olefins and polyolefin. In the following year, the Korean invested RM 2.2 billion (US$ 600 million) for the manufacture of lithium ion batteries and another RM 1.1 billion (US$ 300 million) for the production of photovoltaic functional glass (MIDA, 2011).
In recent years, Korea’s investment in Malaysia has become increasingly more visible in the non-manufacturing sectors such as construction and trading. Many Korean construction firms won major and important projects in Malaysia due to their competitive pricing. Korean firms now constitute 20 % of Malaysia’ construction market, and between 2008 and 2014, they won US$ 16 billion worth of new projects (Yonhap News, 10 December 2014). Among their previous major construction projects include the Petronas Twin Tower by Samsung Engineering and Kukdong Construction, the Penang Bridge by Hyundai Engineering and Construction, Telekom Malaysia Tower by Daewoo and Menara Maybank by Kyungnam. Recently, Korea expressed their intent to secure a US$13 billion project to build a high-speed railway that will connect Malaysia and Singapore. The Korean companies will be facing competition from Spain, Italy, China and Japan.
Education and Cultural Tourism Ties
Aside of trade and investment links, other prominent Malaysia-Korea relations is on the area of education and training. In 1981, there were 40,000 Malaysian students studying overseas, but none was in Korea. After a series of joint Korea-Malaysia meetings held from July 1983 to draw up programmes for education and technical exchange, four types of training schedule were agreed upon. These consisted of industrial and technical training, academic and technical studies, short-term courses for Malaysian executives, and exchanges between training, research and operation institutions as well as between institutions of higher learning.
Malaysia has sent over 2,700 students to South Korea for industrial and technical training since the inception of the Look East Policy, while 1,126 post-graduates from Korea are based in Malaysia. Furthermore, the Korean Foundation provided supports Malaysians for graduate studies and research, and provided post‐doctoral fellowships for Korean Studies. Malaysia also established a Chair in Malay Studies at Korea’s Hankuk University of Foreign Studies in April 2008.
Malaysia is one of the favourite choices for Korean students as a destination for language learning in Asia. The country is among the popular destination after the Philippines and Singapore for English language learning by Korean students. About 2,000 of them reside in the country while studying for English proficiency tests (e.g. IELTS and TOEFL) in special language centres or colleges. The relatively lower educational cost and cost of living, coupled with high standard of education offered are some of the contributing factors in making Malaysia as one of the top choices in learning English. Most English language learning centres in Malaysia have trained professional instructors with extensive experience in preparing for international proficiency tests. Malaysia also offers a suitable platform for learning and practicing English and other languages, due to its demographic make‐up,
The Hallyu Wave has contributed economically to Korea. For a long time Malaysia was an importer of TV programmes from the West, but due to Hallyu, Korea has become an exporter of cultural content (Park, 2015). The export of cultural content did not stop with broadcast programmes, but expanded to K-pop related goods, cosmetics, fashions and mobile phones. The enabling factor for this phenomenon in Malaysia is the high percentage of total airtime set aside for Korean programmes and dramas. The Malaysian fascination with Korean culture, food and fashion has had spill‐over effects in the larger economy with increases in the purchase of Korean consumer products, tourism to Korea, and the increasing number of students taking up Korean Studies programmes.
Tourism is one of the biggest sources of foreign exchange in Malaysia. In 2014, the country received 25.72 million registered tourists who spent US$ 19.83 billion (Tourism Malaysia, 2014). Statistically, the number of Korean visitors in 2014 increased by 40.5 %, from 274,622 in 2013 to 385,769, and comprised of 1.7 per cent of total inbound tourists. The rise in the number of arrivals has been contributed to the expansion of low-cost carrier like Air Asia and Jin Air (subsidiary of Korean Air) which provide direct flights to major cities in Malaysia.
Going Forward
The Future of Malaysia-Korea Relations In December last year, the Malaysian and Korean leaders met in Busan to discuss the forging of stronger collaboration to further develop economic and trade ties. Malaysian’s Prime Minister Najib Razak announced his intention to implement the continuation of the Look East Policy or the Look East Policy 2.0 to deepen the cooperation between Malaysia-Korea and expand it to wider sectors. The policy would be based on guidelines covering 12 indicative areas including trade and industrial cooperation, healthcare, ICT, green technology, biotechnology, education, tourism and more. The potential for further cooperation in the above areas is vast. Korea as a nation known for its knowledge-based and innovative capabilities, can leverage on the investment climate offered by Malaysia to diversify into new growth areas. More investment is expected to be made by Korean companies to Malaysia in green technology, solar panels, real estates, heavy industries and engineering.
The Malaysian government aims to make Malaysia a regional hub for the production and distribution of motor vehicles. Local manufacturers have much to learn from the Korean automotive industry particularly in terms of cost and production efficiency. Thus, it would be a strategic move by the Malaysian producers to learn from the Korean industry as the latter is self-sufficient, and a highly developed industry. With an established electrical and electronics industry base, Malaysia could attract automotive electronic component manufacturers from Korea to establish operations in Malaysia to cater to the domestic and ASEAN markets. Through technical collaboration in projects to manufacture or assemble motor cars/trucks, Korean companies such as Kia, Daewoo and Hyundai could work together with local manufacturers and contribute towards the development of the automotive industry in Malaysia.
In the area of finance, Malaysia has a well-developed financial system, with deep capital markets including a comprehensive system of Islamic finance. The Malaysian bond market is the fourth largest in Asia in terms of volume after Japan, China and Korea. More than 55 percent of the outstanding bonds are Shariah compliant and the Sukuk market is the largest in the world. In 2008, the Export-Import Bank of Korea and Industrial Bank of Korea has successfully raised a total of RM2 billion via bond issuance in the Malaysian bond market. In addition, Korean investors can also participate in the wide range of Islamic financial instruments in the Malaysian financial markets, including from more than 150 Islamic unit trusts, Islamic REITs, wholesale mutual fund products and other Islamic structured products (BNM, 2015).
The modernisation of the telecommunications infrastructure in Malaysia and Asia has provided further impetus for the fast expanding telecommunications equipment sector. As Korea is the leading producer of smart phones and manufacturers of various ICT products such as computers, optical storage, recording media, monitors, media players, its participation in Malaysia would be a boost to the development of the ICT industry in Malaysia.
Challenges Ahead
The ability of Malaysian and Korean economy to withstand economic crisis and grow sustainably are the leading contributors which enable Malaysia-Korea economic relation to be sustainable and strengthened. It is expected that the two-way trade between the two countries will continue in an upward trend due to their complementary trade structure. Nevertheless, there are still several challenges that need to be addressed by Malaysia in strengthening the bilateral ties.
For Malaysia, the most important concern is the competition with Vietnam and China in attracting prospective investors from Korea. The emergence of these countries as the new strategic destinations for foreign investments for the past few years have critically affected Malaysia’s position to attract and sustain foreign investors. Previously, Malaysia faced competition from neighbouring countries like Thailand and Indonesia. The rapid industrialization growth in China in recent years and its abundant of cheaper labour costs has attracted multitude of manufacturers from all over the world. Various manufacturers relocate their factories from Southeast Asia to China to take advantage of the low labour cost and the large domestic market.
This worrying trend posed some uncertainty for Malaysia’s prospect in the future as the economic growth enjoyed by Malaysia has relied largely from foreign investments. Evidently, the Malaysian government need to formulate new action plan to attract foreign investors or for Malaysia to become less dependent on foreign investment. One of the plans is to attract investment through the formation of bilateral Free Trade Agreement and increase incentive packages for investors. Nevertheless, Malaysia still enjoys numerous advantages in comparison with other ASEAN countries such as political stability, consistent government policy, better management and strong infrastructure and support service.
Conclusion
Malaysia and Korea has formed a strong trade and investment ties since the 1980s. The Look East Policy has catapulted the relation between the two countries into a new level, which enables more areas of cooperation to be explored, such as cultural, academic and personnel exchanges. Korea is not only one of the biggest foreign investors in Malaysia, but also a key trading partner. The close relation between Korea and Malaysia will for certain be strengthened in the future as both parties have expressed their desires to continue their economic cooperation.
Even though the prospect of Malaysia-Korea relations seems positive in the future, there are always concerns that Malaysia would lose its competitive advantage as primary commodity producers and in attracting and sustaining foreign investors. Competition from the neighbouring countries is the biggest challenge yet. As such, a new game plan is needed to reinforce the Malaysia-Korea economic relation. Indeed, further enhancement of the relationship between the two nations for certain will result in a mutually favourable partnership to ensure sustainable economic development in the future.
