The Impacts of Foreign Labour Entry on the Labour Productivity in the Malaysian Manufacturing Sector

(ProQuest: . denotes formulae omitted.)1. IntroductionLabour productivity is an important, frequently emphasised element in any sector as part of an effort to keep a sector competitive in the global market. The growth of the industrial sector has been successful in increasing export and this effectively led to the innovation of new technologies and improvements in the internal management of firms. Since independence, Malaysia has experienced encouraging phases of economic development through various economic development policies and strategies. In fact, before the Asian financial crisis in the year 1997, the country is known as one of the rapidly growing economies on par with the developed economies in East Asia such as Japan, South Korea, Taiwan and Hong Kong (Ishak Yussof & Nor Aini, 2009). A rapidly growing manufacturing sector can speed up the growth of an economy due to its share in the Gross Domestic Product (GDP), job creation and foreign exchange. One of the most effective ways to further improve this sector is by improving labour productivity. The logic is simple; a higher productivity means that the same number of inputs can produce higher quantities of output. Sahar (2002) explains that a high labour productivity in the manufacturing sector can help create sustainable growth and development of a country.Economic growth is an important determinant of national development and these are two interrelated concepts. A country can grow without developing, but to develop, a country needs to grow. Economic growth requires a combination of a number of factors, including labour, land, capital and technology being employed efficiently without waste. Labour - local and foreign - is an important part of this equation. In general, the rationale behind employing foreign labour is to fill the gap create by the shortage of labour supply in the local labour market especially in sectors like farming, construction, service, industrial and manufacturing. This is a short term solution according to Preibisch (2007). Nevertheless, the output generated through the foreign labour contributes positively to the country's export.It must be noted that foreign labour has contributed to Malaysia's economic growth, especially with regard to the GDP and aggregate expenditure. The government has effectively prevented excessive increases in wages and inflation. The wages paid to the foreign workers are considerably lower than the what the locals receive. Despite the relatively lower wages, the foreign labour positively contribute to increase in demand (Borjas, 2006). However, being a short-term solution, the economy cannot continuously depend on the contributions of foreign workers. With the country looking to become a high earning economy by 2020, a switch of strategy is important and thus, rather than relying on the number of inputs, more emphasis should be given to increasing productivity of input.An influx of foreign workers can affect an economy both positively and negatively. Its influence on the labour market depends on its role, whether as a substitute or a complement to the local workers. Boijas (1993) found a negative impact of foreign workers. However, he stressed that such negative influence is only valid for unskilled foreign labour. The direction of the effects of foreign worker entry on a market depends on their productivity. Highly productive, skilled foreign worker can immensely contribute to an (Hercowitz et al. 1999). On the other hand, unskilled foreign workers may have problems adapting and may end up needing more help than contributing. It is worth noting that several studies have been conducted on this topic but the results have been inconsistent. As such, the issue is very much inconclusive. It is therefore imperative for researchers to keep on studying the subject and more importantly on the factors that make the results so inconsistent.Compared to more developed economies like China, Singapore and South Korea, our labour productivity is still relatively modest (Malaysia Productivity Corporation, 2013). …