Press Release

November 18, 2021
ASEAN-Japan Centre

Non-equity Modes (NEM) of Trade in Malaysia sees strong participation in exports and integration
with global value chains of TNCs according to the study by ASEAN-Japan Centre“Non-Equity Modes of Trade in ASEAN” in Malaysia is available for download on AJC website

ASEAN-Japan Centre (AJC) issued the paper 5 of the “Non-Equity Modes of Trade in ASEAN: Promoting New Formsof Trade between Japan and ASEAN” series focusing on Malaysia. The paper finds that Malaysia has strong
participation in NEMs exports and connects strongly with the global value chains of transnational corporations (TNCs).
According to the paper, NEM operates in the country through the following modalities and industries: subcontracting inelectronics and textiles and apparels, contract farming in agriculture and food processing, franchising in hotels, fastfood chains and retail stores.
Out of the four leading export products from Malaysia—electric and electronics (EE) products, oil and gas, palm oil andtextiles and apparel—the first and last were driven by foreign direct investments (FDI) or NEM or a combination of both.
Since the 1970s, Malaysia has been a major exporter of electric-electronics products and still offers great growthpotential for the country. The volume of direct and indirect electronic exports through NEMs is around 70% of totalexports in 2018, showing an increase from 66% in 2015. Subcontracting in the electronics industry grew significantly
beginning in the 1990s as competition drove TNCs to outsource components and parts to local firms to lower costs.
During this period, major electronics companies dedicated themselves to peripheral aspects of research anddevelopment, product design and brand management. In time, Malaysia has evolved its own NEMs in the EE industry,
such as Globetronics, Carsem, Unisem, who have become successful subcontract producers of electronic chips withoriginal equipment manufacturer (OEM) and original design manufacturing capabilities.
Subcontracting has also expanded into low-value added industries such as apparel, footwear, and toy industries.
Malaysian NEMs have grown to manufacture apparel and accessories with local brand names such as Padini and Allan1

Dillion, with main export markets like the US, Japan, Turkey, Indonesia and China. In the agricultural industry,government promotion of contract farming has strengthened the export of farm products through the Federal AgriculturalMarketing Authority (FAMA) as part of the Ninth Malaysia Plan of 2006-2010. In 2014, the government opened 7,500
hectares of land involving 4,500 farmers under contract farming. While NEM can help raise farmers’ incomes andpotentially expand export revenue, the growing deficit in agro-food trade suggests a serious need to raise productivity.
Franchising in the hotel and tourism industry in Malaysia has grown rapidly over the years, with the number of arrivals
and receipts rising from US$15.5 billion in 2007 to US$20.8 billion in 2018. NEM operations through franchise
agreements with foreign brand holders are extensive, and given that Malaysia is an upper middle-income country, locals
run the top management of the hotels instead of foreign managers.
Despite becoming an upper middle-income country, its economic activities are largely confined to low and mediumvalue added activities and Malaysia has yet to transition to high value-added activities. The paper recommends thefollowing NEM-related strategies to achieve this goal: (1) linking up with TNCs’ global value chains as suppliers throughthe operations of local firms and training of national workers; (2) development of high-level capabilities in management,
inventory and quality control and production technology to meet TNC standards and demands; (3) rapid technologicalupgrading of local firms; (4) provide initiative for local firms to upgrade beyond OEM to original design activities; and (5)local firms to launch new businesses to stimulate sales growth, job creation and exports. On the policy side, thegovernment can strengthen the four pillars of the systemic squad—basic infrastructure, science, technology andinnovation (STI) infrastructure, connectivity and coordination, and integration in global factor and final markets—toattract TNCs. Finally, a focus on sustainable development goals such as on energy, climate change and workers’ humanrights must be incorporated in the government initiatives to shape the conduct of NEM firms.
“Non-Equity Modes of Trade in ASEAN: Promoting new forms of trade between Japan and ASEAN: Paper 5 Malaysia”
is available for download on AJC’s website as below.

https://www.asean.or.jp/en/trade-info/nem_papers/

Contact:
ASEAN-Japan Centre (AJC) PR Unit
Tomoko Miyauchi (MS)URL: https://www.asean.or.jp/en/
TEL: 03-5402-8118
E-mail: toiawase_ga@asean.or.jp

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