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Manufacturing Performance and Services Inputs:
Evidence from Malaysia
Cassey Lee
ISEAS – Yusof Ishak Institute
February 2019
Abstract
The Malaysian economy has been deindustrializing since the late 1990s. The relative decline
of the country’s export-oriented manufacturing sector has led to a decline in the trade ratio.
This could reflect a decline in the country’s participation in manufacturing global value chains.
The services sector makes important contributions to the performance of the manufacturing
sector in terms of productivity and exporting. Therefore, any policy attempt to enhance
manufacturing performance is likely to require improvements in the performance of the
services sector. This is particularly important as there is evidence that the country’s
manufacturing sector is increasingly dependent on services generated domestically.
Keywords: Manufacturing Performance, Services, Productivity, Exporting
JEL Codes: L16, F14, O14
No. 2019 - 02
1
Manufacturing Performance and Services Inputs:
Evidence from Malaysia
Cassey Lee1
1. Introduction
The manufacturing sector has played a key role in the effort of developing countries to grow
and prosper. This has been the experience of the Malaysian economy since the 1960s.
However, since the late 1990s, the country’s economy has begun to de-industrialize. As much
of Malaysia’s manufacturing has been primarily export-oriented, the relative decline in the
sector’s contribution to the country’s economy has also resulted in a decline in its participation
in the global economy. Parallel to these developments is the rise of the services sector. Whilst
the services sector has always been important to the manufacturing sector, its role has likely to
become even more important with the advent of global value chains (GVCs) and global
production networks (GPNs). Empirically, this can be seen by the contribution of the service
sector to the manufacturing sector’s output. Globally, services account for half of the value of
world trade (Miroudot and Cadestin, 2017).
The goal of this paper is to investigate the empirical relationship between services
inputs and the performance of the manufacturing sector in Malaysia. This is undertaken within
the context of structural change in Malaysia, namely, deindustrialization in the country. This
took the form of a relative decline in the manufacturing sector’s share of the economy’s GDP
and total employment since the late 1990s.
The outline for the rest of this study is as follows. Section 2 of the paper provides a
discussion of the structural change in the Malaysian economy since the 1990s. This is to be
followed by a broad discussion of the linkages between services and manufacturing in the
Malaysian economy in Section 3. The research literature on the relationship between services
inputs and manufacturing performance is discussed in Section 4. An econometric analysis of
the links between services and manufacturing is undertaken in Section 5. Section 6 concludes
with some policy discussions.
1 The author thanks Christopher Findlay, Fukunari Kimura, Shandre Thangavelu, Lurong Chen and the
Economic Research Institute for ASEAN and East Asia (ERIA) for their comments and support. The usual
caveat applies.
2
2. Structural Change in Manufacturing and Services
2.1 Manufacturing
The Malaysian economy has been de-industrializing over the past fifteen years. This can be
seen in the decline in the manufacturing sector’s share of GDP and total employment. In terms
of the share of GDP, the manufacturing sector’s share of real GDP peaked at close to 31 per
cent in 1999 (Figure 1). Thereafter, it declined almost continuously every year, and the sector’s
share of GDP had declined to 22 per cent by 2016. The services sector’s share of the GDP has
gradually increased from 32 per cent in 1974 to 53 per cent in 2016. Even though there were
some fluctuations in the services’ share of GDP during some period, it increased rapidly in the
period after 2004.
The figures on employment paint a similar picture (Figure 2). The “inflection point”
where the decline in the manufacturing sector’s share of total employment occurred even
earlier, namely in 1994 – some five years earlier than the decline in the sector’s share of GDP.
In that year, the manufacturing sector’s share of employment stood at 25 per cent. This share
had declined to 17 per cent by 2016. In contrast, the services’ sector share of total employment
increased from 47 per cent in 1994 to 63 per cent in 2016.
Source: World Bank
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Figure 1: Structural Composition of Malaysia's GDP, 1960-2016
Agriculture Manufacturing Services Mining
3
Source: Department of Statistics, Malaysia
As the manufacturing sector is very export-oriented, the decline in its relative share has
also affected the country’s “openness” or engagement with the global economy. Malaysia’s
trade ratio (i.e. total exports and imports divided by GDP) has also declined during this period
of deindustrialization. After increasing over a period of about thirty years, Malaysia’s trade
ratio peaked at 220 per cent in 2000 (Figure 3). Thereafter, it declined to 129 per cent in 2016.
The manufacturing sector’s share of total merchandise exports also declined from 80 per cent
in 2000 to 61 per cent in 2013 (Figure 4). Its share of total merchandise exports has recovered
slightly since 2014, probably due to the decline in the value of oil exports amidst steep decline
in oil price and the ringgit depreciation.
It might be useful to take a more disaggregated and detailed analysis of the export
performance of the manufacturing sector to better understand the structural changes taking
place within the sector. In terms of the composition of manufactured exports, the machinery
and transport equipment industry is by far the largest contributor, accounting for almost 63 per
cent of total manufactured exports. The industry’s decline in its share of total manufactured
exports began in 1999 and fell to as low as 38 per cent by 2012 (Figure 5).
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Pe
rce
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are
(%
)Figure 2: Sectoral Composition of Total Employment, 1985-2016
Agriculture, Forestry and Fishing Mining and Quarrying
Manufacturing Construction
Services
4
Source: Department of Statistics, Malaysia
Source: Department of Statistics, Malaysia
0
50
100
150
200
250
Pe
rce
nta
ge
(%
)Figure 3: Trade as Percentage of GDP, 1960-2016
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rce
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Sh
are
(%
)
Figure 4: Manufactures Exports , 1964-2016
(% of merchandise exports)
5
Source: Department of Statistics, Malaysia
Within the machinery and transport equipment industry (two-digit level), two sub-
industries (at three-digit level) experienced a significant decline in the percentage share of
exports from the industry (Figure 6). These are: (i) office machines and automatic data
processing equipment; and (ii) telecommunications and sound recording and reproducing
apparatus and equipment. The total exports from these industries also declined in absolute
terms, though the inflection point for the declines occurred much later in 2006 (Figure 7).
Within these industries, at the four-digit level, the decline can be observed for the
manufacturing of computers and televisions (Figure 8 and Figure 9). Thus, Malaysia
participation in the GVCs in these industries may have declined.
In contrast, one sub-industry, namely electrical machinery, apparatus and appliances
experienced an increase in absolute terms as well as in terms of its share of exports from the
machinery and transport equipment industry (Figure 6 and Figure 7).
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Pe
rce
nta
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Sh
are
of
Tota
l E
xpo
rts
(%)
Figure 5: Composition of Total Exports, 1990-2017
Crude Materials, Inedible Mineral Fuels, Lubricants, etc.
Animal and Vegetable Oils and Fats Chemicals
Manufactured Goods Machinery & Transport Equipment
Miscellaneous Manufactured Articles Others
6
Source: Department of Statistics, Malaysia
Source: Department of Statistics, Malaysia
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Pe
rce
nta
ge
Sh
are
(%
)Figure 6: Composition of Exports from
the Machinery & Transport Equipment Industry
Power Generating Machinery and
Equipment
Machinery Specialized for Particular
Industries
Metalworking Machinery
General Industrial Machinery and
Equipment, n.e.s. and Machine Parts,
n.e.s.
Office Machines and Automatic Data
Processing Equipment
Telecommunications and Sound
Recording and Reproducing
Apparatus and Equipment
Electrical Machinery, Apparatus and
Appliances, n.e.s. and Electrical Parts
thereof
Road Vehicles (Including Air - Cushion
Vehicles)
-
50,000
100,000
150,000
200,000
250,000
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Mil
lio
n,
RM
Figure 7: Exports - Machinery & Transport Equipment Industry
Power Generating Machinery and Equipment
Machinery Specialized for Particular Industries
Metalworking Machinery
General Industrial Machinery and Equipment, n.e.s. and Machine Parts, n.e.s.
Office Machines and Automatic Data Processing Equipment
Telecommunications and Sound Recording and Reproducing Apparatus and Equipment
Electrical Machinery, Apparatus and Appliances, n.e.s. and Electrical Parts thereof
Road Vehicles (Including Air - Cushion Vehicles)
Others Transport Equipment
7
Source: Department of Statistics, Malaysia
Source: Department of Statistics, Malaysia
0
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RM
, M
illi
on
Figure 8: Exports from the Office Machines and
Automatic Data Processing Equipment Industry
Office Machines (751)
Automatic Data Processing Machines And Units Thereof (752)
Parts And Accessories For Use Within Groups 751 And 752
-
5,000
10,000
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Figure 9: Exports from Telecommunications and Sound Recording and
Reproducing Apparatus and Equipment Industry
Television Receivers With Radio- Broadcast Receivers, Sound Recorders Or Reproducers
Radio-Broadcast Receivers With Sound Recorders Or Reproducers
Sound Recorders Or Reproducers; Television Image And Sound Recorders Or Reproducers;
Prepared Unrecorded MediaTelecommunications Equipments, N.E.S.; Their Parts, And Accessories Used In Division 76
8
2.2 Services
Similar to the manufacturing sector, structural change has taken place in the services sector
since 2000.2 On the whole, the wholesale and retail trade sub-sectors have become relatively
more important (Figure 10). Both account for close to 30 per cent of total GDP from the
services sector. Retail trade, in particular, has grown rapidly in recent years. Other important
services industries include finance and real estate. The share of the former has gradually
declined over the past ten years.
Source: Department of Statistics, Malaysia
2 See Appendix for an official classification of services.
0
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6
8
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12
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18
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Pe
rce
nta
ge
Sh
are
(%
)
Figure 10: Composition of Services GDPElectricity and gas
Water
Wholesale trade
Retail trade
Motor vehicles
Restaurants
Accommodation
Transport
and storage
Communication
Finance
Insurance
Real estate
and business
services
9
Needless to say, the services industries are very diverse. For example, retail trade is
very different from transport. This can be seen by examining the significant variations in labour
productivity and capital intensity across the different services industries (see Figure 11 and
Figure 12). To some extent, this is due to variations in capital intensity across these industries.
For example, food and beverage has very high value-added per worker but very low fixed asset
per worker. In contrast, labour productivity is very low in industries with very high capital
intensity such as utilities (electricity and water). Given that the export performance of the
manufacturing sector may depend on its linkages to services, the performance of the relevant
services industries is important. Comparing the statistics from the manufacturing census in
2010 and 2015, there has been an overall increase in capital intensity and a decline in value-
added per worker. But how exactly are the two sectors linked? This is examined next.
Source: Department of Statistics, Malaysia
- 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000
Electricity, gas, steam & air conditioning supply
Water supply; sewerage, waste management &…
Wholesale & retail trade
Transportation & storage
Accommodation
Food & beverage
Information & communication
Finance
Real estate
Professional, scientific & technical
Administrative & support service
Education
Health & social work
Arts, entertainment & recreation
Personal services & other activities
RM
Figure 11: Value-Added per Worker in Services Industries
2015 2010
10
Source: Department of Statistics, Malaysia
3. Linkages Between Services and Manufactured Exports in Malaysia
Sectoral interdependence between services and manufacturing is usually studied using input-
output (IO) tables. This is the source of data used by the OECD-WTO TiVA Database (2000-
2011). Another source is micro-level surveys at the firm level, such as manufacturing surveys
and census. In this second source of data, services are recorded as inputs in the production
process. Both sources are reviewed in this section.
3.1 OECD-WTO TiVA Database
Examining the data for Malaysia, it is found that the share of services’ value-added share
manufactured exports has been relatively stable at 30 per cent during the 2000-2011 period.
Despite such stability in the contribution of services to manufacturing value-added, there has
been an important structural change within services. In particular, the domestic component of
the services’ contribution to manufacturing value-added has increased. For example, the share
of domestic services’ value-added in manufactured exports has increased from 14 per cent in
2000 to 24 per cent in 2011. Focusing on the key exporting manufacturing sub-sectors such as
computers, electronic and optical equipment, the share of retail and wholesale services (the
largest services contributor) to the output of this industry decreased during the period 2001 to
2006. However, this trend was reversed after 2006 (see Figure 13, Figure 14 and Figure 15).
- 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000
Electricity, gas, steam & air conditioning supply
Water supply; sewerage, waste management &…
Wholesale & retail trade
Transportation & storage
Accommodation
Food & beverage
Information & communication
Finance
Real estate
Professional, scientific & technical
Administrative & support service
Education
Health & social work
Arts, entertainment & recreation
Personal services & other activities
RM
Figure 12: Fixed Asset per Worker in Services Industries
2010 2015
11
Source: OECD-WTO TiVA Database
Source: OECD-WTO TiVA Database
0
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30
40
50
60
70
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Pe
rce
nta
ge
Sh
are
(%
)Figure 13: Sectoral Value-Added Share in Manufactured Exports
Agriculture, hunting, forestry and fishing Mining and quarrying Manufactures Services
0
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30
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50
60
70
80
90
100
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Pe
rce
nta
ge
Sh
are
(%
)
Figure 14: Composition of Services Value-Added
in Manufactured Exports
Imported Domestic
12
Source: OECD-WTO TiVA Database
Amongst the key exporting manufacturing industries, there has been a slight increase
in the share of service’s value-added share in exports of electrical and optical equipment
(Figure 16). However, the share of domestic services’ contribution to manufactured exports
from key exporting manufacturing industries has risen rapidly since 2004 (Figure 17). This
suggests that the importance of domestic services to manufactured exports in Malaysia has
increased in recent years.
0.0
2.0
4.0
6.0
8.0
10.0
12.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Pe
rce
nta
ge
Sh
are
(%
)Figure 15: Share of Contribution of Key Services to Output from
Computer, Electronic and Optical Equipment
Wholesale and retail trade; repairs Transport and storage
Financial intermediation Electricity, gas and water supply
13
Source: OECD-WTO TiVA Database
Source: OECD-WTO TiVA Database
0
5
10
15
20
25
30
35
40
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Pe
rce
nta
ge
Sh
are
(%
)Figure 16: Share of Services in Value-Added Exports
Machinery and Equipment Electrical and Optical Equipment Transport Equipment
0
5
10
15
20
25
30
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Pe
rce
nta
ge
Sh
are
(%
)
Figure 17: Share of Domestic Services in Total Value-Added Services for
Exports
Machinery and Equipment Electrical and Optical Equipment Transport Equipment
14
3.2 Manufacturing Census
The manufacturing census in Malaysia is carried out by the Department of Statistics once every
five years. The latest manufacturing census covers 2010 and 2015. The link between services
and manufacturing can be measured in two ways:
(i) services as an input in total intermediate cost; and
(ii) services as an output in total sales.
The first measure is a familiar one – services inputs as important factors of production
in the manufacturing sector. In the manufacturing census, services inputs are defined as “non-
industrial services” which includes transportation of goods, travel by workers, management
services, information technology, advertising, banking services, postal/courier services and
telecommunications.
The second measure captures a phenomenon not often discussed in the research
literature, namely, manufacturing firms selling services. This includes “non-industrial
services” such as management services, and income from rental property. It may include (not
clarified in the census reports) leasing of products rather than outright sale; (ii) sale of expertise
to other firms through consulting services; and (iii) royalty payments on patents owned.
In terms of services as inputs in manufacturing, the trend is very uneven across the
various manufacturing industries (Figure 18). Overall, services inputs account for less than 10
per cent in many industries. Obviously, the share of services inputs is significantly lower than
the estimated derived using the TiVA database because only direct services input costs are
included in the manufacturing census.
The share of services as percentage of total sales is fairly small in most of the
manufacturing industries. There are a few industries with very high share of services in their
total sales but these are fairly unstable when we compare the levels in 2010 and 2015 (Figure
19).
15
Source: Department of Statistics, Malaysia
0 5 10 15 20 25 30
Manufacture of knitted and crocheted apparel
Manufacture of irradiation, electro medical and electrotherapeutic…
Manufacture of man-made fibres
Printing and service activities related to printing
Manufacture of glass and glass products
Manufacture of products of wood, cork, straw and plaiting materials
Manufacture of furniture
Manufacture of measuring, testing, navigating and control equipment;…
Manufacture of non-metallic mineral products n.e.c.
Manufacture of sports goods
Manufacture of other chemical products
Manufacture of pharmaceuticals, medical chemical and botanical…
Other manufacturing n.e.c.
Manufacture of basic chemicals, fertilizer and nitrogen compounds,…
Repair of fabricated metal products, machinery and equipment
Processing and preserving of fruits and vegetables
Manufacture of military fighting vehicles;Manufacture of transport…
Manufacture of wearing apparel, except fur apparel
Manufacture of special-purpose machinery
Casting of metals
Manufacture of articles of fur
Manufacture of other food products
Reproduction of recorded media
Manufacture of general-purpose machinery
Manufacture of other fabricated metal products; metalworking service…
Manufacture of railway and rolling stock; Manufacture of air and…
Manufacture of games and toys
Manufacture of electric lighting equipment
Manufacture of bodies(coachwork) for motor vehicles; manufacture of…
Sawmilling and planning of wood
Manufacture of footwear
Manufacture of structural metal products, tanks, reservoirs and steam…
Manufacture of paper and paper products
Manufacture of plastic products
Manufacture of medical and dental instrument and supplies
Manufacture of magnetic and optical media
Manufacture of prepared animal feeds
Manufacture of electric motors, generators, transformers and electricity…
Manufacture of basic iron and steel
Manufacture of other textiles
Spining, weaving and finishing of textiles
Installation of industrial machinery and equipment
Tanning and dressing of leather; manufacture of luggage, handbags,…
Building of ships and boats
Manufacture of beverages
Processing and preserving of fish, crustaceans and molluscs
Processing and preserving of meat
Manufacture of parts and accessories for motor vehicles
Manufacture of rubber products
Manufacture of refined petroleum products
Manufacture of other electrical equipment
Manufacture of basic precious and other non-ferrous metals
Manufacture of motor vehicles
Manufacture of dairy products
Manufacture of tobacco products
Manufacture of grain mill products, starches and starch products
Manufacture of batteries and accumulators
Manufacture of wiring and wiring devices
Manufacture of electronic components and boards
Manufacture of communication equipment
Manufacture of consumer electronics
Manufacture of vegetable and animal oils and fats
Manufacture of optical instruments and photographic equipment
Manufacture of domestic appliances
Manufacture of jewellery, bijouterie and related articles
Manufacture of computers and peripheral equipment
Manufacture of musical instruments
Percentage (%)
Figure 18: Services' Share in Intermediate Cost
2015 2010
16
Source: Department of Statistics, Malaysia
0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0
Building of ships and boats
Repair of fabricated metal products, machinery and equipment
Manufacture of military fighting vehicles;Manufacture of transport…
Manufacture of jewellery, bijouterie and related articles
Installation of industrial machinery and equipment
Manufacture of electronic components and boards
Manufacture of railway and rolling stock
Manufacture of measuring, testing, navigating and control…
Manufacture of bodies(coachwork) for motor vehicles; manufacture…
Manufacture of motor vehicles
Manufacture of wearing apparel, except fur apparel
Manufacture of refined petroleum products
Processing and preserving of meat
Sawmilling and planning of wood
Manufacture of other fabricated metal products; metalworking…
Manufacture of structural metal products, tanks, reservoirs and steam…
Manufacture of electric lighting equipment
Manufacture of medical and dental instrument and supplies
Printing and service activities related to printing
Casting of metals
Manufacture of domestic appliances
Processing and preserving of fruits and vegetables
Manufacture of special-purpose machinery
Manufacture of electric motors, generators, transformers and…
Manufacture of other textiles
Spining, weaving and finishing of textiles
Manufacture of general-purpose machinery
Manufacture of basic chemicals, fertilizer and nitrogen compounds,…
Manufacture of communication equipment
Manufacture of furniture
Manufacture of products of wood, cork, straw and plaiting materials
Manufacture of sports goods
Manufacture of other electrical equipment
Manufacture of rubber products
Manufacture of basic iron and steel
Manufacture of vegetable and animal oils and fats
Manufacture of grain mill products, starches and starch products
Manufacture of plastic products
Manufacture of footwear
Manufacture of pharmaceuticals, medical chemical and botanical…
Manufacture of basic precious and other non-ferrous metals
Processing and preserving of fish, crustaceans and molluscs
Manufacture of other chemical products
Manufacture of paper and paper products
Manufacture of knitted and crocheted apparel
Manufacture of wiring and wiring devices
Other manufacturing n.e.c.
Manufacture of beverages
Manufacture of other food products
Manufacture of parts and accessories for motor vehicles
Manufacture of non-metallic mineral products n.e.c.
Manufacture of irradiation, electro medical and electrotherapeutic…
Manufacture of prepared animal feeds
Tanning and dressing of leather; manufacture of luggage, handbags,…
Manufacture of batteries and accumulators
Manufacture of glass and glass products
Manufacture of computers and peripheral equipment
Manufacture of games and toys
Manufacture of consumer electronics
Manufacture of dairy products
Manufacture of tobacco products
Manufacture of articles of fur
Reproduction of recorded media
Manufacture of man-made fibres
Manufacture of optical instruments and photographic equipment
Manufacture of magnetic and optical media
Manufacture of musical instruments
Percent (%)
Figure 19: Services' Share of Total Sales
2015 2010
17
4. Literature Review on Services Inputs and Manufacturing Performance
The relationship between services inputs and manufacturing performance has been an active
area of econometrics research in recent years. However, data availability has been a key
constraint. Ideally, micro-level data would be preferred but most existing surveys and census
of manufacturing lack details on the use of the different types of services as inputs. More
highly aggregated data in the form of input-output tables has been the key source of data for
analysing the linkages between services and manufacturing in the past. As a result, there are
variations in the types of data used across the different studies on this topic.
An early work on this topic is that of Francois and Woerz (2007) who used a panel
industry-level data covering seventy-eight countries during the period 1994-2004. The authors
found that the growth in the manufacturing sector is positively related to demand for producer
and business services (the former is a nonlinear or U-shaped relationship). In addition, greater
use of imported business services is associated with manufacturing exports especially in
technologically-intensive industries.
Another study using industry-level panel data is that by Wolfmayr (2008) who
examined the relationship between export market shares of sixteen OECD countries in eighteen
industries and the use of domestic as well as imported inputs. The latter is measured by
deriving the ratio between total value of services purchased by a given industry divided by the
total output of the industry. The author finds that increases in market shares are positively
correlated to the use of imported services especially in high-skilled and technology-driven
industries.
Tarr (2012) provides a summary of six empirical studies using firm-level data on the
impact of the liberalization of the services sector in transition economies. A number of these
studies found that liberalisation of the services sector is significantly related to productivity
and exporting in the manufacturing sector. Interestingly, one of the studies reviewed suggests
that services liberalisation is particularly important for domestic small and medium-size firms.
Berulava (2011) uses firm-level panel data from the surveys conducted by EBRD and
World Bank in twenty-nine European and Central Asia countries to investigate the relationship
between exporting and services. Services was proxied in two ways - in terms of whether they
are considered to be obstacles to businesses and in terms of the EBRD policy reform indices.
Overall, the study found that improvements in services would enhance the export performance
of manufacturing firms.
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Bas (2013) examines the effect of services liberalization on export performance of firms
in the manufacturing sector in India. In the study, services liberalization is measured using
OECD’s ETCR index which measures regulatory conditions in the energy, transport and
communications sector. The study found that services liberalization is associated with an
increase in the propensity and intensity of exporting in the downstream manufacturing
industries.
In Hoekman and Shepherd (2017), the World Bank’s survey data covering 119
countries was used to investigate the relationship between services productivity and the
productivity of manufacturing firms. This was followed by estimating the relationship between
productivity and exporting. The authors found that an increase in services productivity is
associated with an increase in firm productivity. The latter is also positively related to the
volume of exports.
To sum up the literature, there is sufficient empirical evidence to indicate that: (i) there
is a positive link between services inputs and manufacturing activities, and (ii) services
liberalization is positively associated with exporting propensity and intensity. These studies
provide some useful insights into how to investigate the relationship between services and
manufactured exports.
5. Econometric Analysis of Services and Exporting
The services sector has strong links with the manufacturing sector. The literature reviewed
earlier shows that the greater use of services and improvements in the performance of the
services sector are associated with greater performance of the manufacturing sector in terms of
productivity and exporting. In this section, industry-level data is used to investigate the
relationship between services input and manufacturing performance in terms of exporting and
productivity.
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5.1 Methodology: Model Specification and Data
Productivity is a key measure of performance. In the first specification, labour productivity
(LP) is used as a dependent variable. The explanatory variables include the use of services
inputs (SV - services share of intermediate inputs or services cost per worker), research and
development activities (RD - R&D expenditure per worker), investment in information
technology (IT – expenditures on IT per worker), and product differentiation (AD - expenditure
on advertising per worker). The panel regression model involving industry i at time t can be
summarized in the following equation:
0 1 2 3 4it it it it it itLP SV RD IT ADβ β β β β= + + + + + ε (1)
The relationship between exporting and labour productivity is estimated using two
specifications. In the first specification, the dependent variable is the percentage of revenues
from exporting (EXPSALE). The independent variables are labour productivity (LP), capital
intensity (K - fixed asset per worker) and average firm size (SIZE):
0 1 2 3it it it it itEXPSALE LP K SIZEβ β β β= + + + + ε (2)
Another alternative is to specification (2) is to use the percentage of establishments
exporting (EXPESTD) as a dependent variable:
0 1 32it it it it it
EXPESTD LP K SIZEβ β β β= + + + + ε (3)
The panel regression is estimated using data from the Malaysian Manufacturing Census
compiled by the Department of Statistics for the years 2010 and 2015. The data is at the three-
digit level industry involving sixty-seven manufacturing industries. The Hausman
specification test is used to identify whether fixed or random effects panel regression is the
appropriate approach.
The summary statistics of the data is presented in Table 1. From the table, it can be
seen that the average share of services as a percentage of intermediate input is around 6-7 per
cent. Furthermore, an average of about 38-43 per cent of total shares come from exports.
Comparing both data from 2010 and 2015, the average value-added per worker and average
R&D expenditure per worker declined significantly from 2010 to 2015. However, the average
firm size in terms of number of workers per establishment increased during this period.
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Table 1: Summary Statistics
Year 2010
Variable Obs Mean Std. Dev. Min Max
Number of Workers 67 26,597 32,299 21 182,487
Value-Added per Worker (RM) 67 216.92 559.42 23.52 4,601.26
Services' Share of Intermediate Inputs (%) 67 7.06 3.97 1.23 24.28
R&D Expenditure per Worker (RM) 67 4,659.97 10,925.33
- 85,758.44
IT Expenditure per Worker (RM) 67 480 1,306.45
- 10,362.57
Advertising Expenditure per Worker (RM) 67 1,144.38 2,028.93 8 13,929.16
Exports Share of Total Sales (%) 67 43.71 26.26
- 89.76
Workers per Establishment 67 87 127 2 638
Year 2015
Variable Obs Mean
Std.
Dev. Min Max
Number of Workers 67 31,164 35,969 26 194,068
Value-Added per Worker (RM) 67 92.6 219.14 4.36 1,764.52
Services' Share of Intermediate Inputs (%) 67 5.67 2.24 0.92 13.33
R&D Expenditure per Worker (RM) 67 1,722.15 4,050.04
- 25,149.60
IT Expenditure per Worker (RM) 67 554.55 2,930.44
- 24,011.45
Advertising Expenditure per Worker (RM) 67 880.88 1,761.34 2.02 12,617.75
Exports Share of Total Sales (%) 62 38.29 23.17
- 93.4
Workers per Establishment 67 150 193 4 787
5.2 Empirical Analysis
The results from the panel regressions are summarized in Table 2 and Table 3. For the panel
regressions on the determinants of labour productivity, the greater use of services inputs is
associated with higher average labour productivity. This relationship is statistically significant
and holds irrespective of whether services inputs is measured as a share of intermediate cost or
as cost per worker. The independent variables R&D expenditure, IT expenditure and
advertising expenditure all have positive coefficients and are statistically significant.
In the second set of panel regressions, higher labour productivity is found to be
associated with greater share of exports in total revenues and percentage (propensity) of firms
exporting. Firm size is another statistically significant variable with positive coefficient. The
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sign of the coefficient for capital intensity differs for share of exports in revenues and
propensity of firm exporting. Overall, the findings on the importance of services to exporting
is consistent with the literature reviewed earlier.
Table 2: Determinants of Labour Productivity
(1) (2)
Variables ln(VA per Worker) ln(VA per Worker)
ln(Service Share of Intermediate Cost) 1.257***
0.178
ln(Service Cost per Worker)
0.921***
0.173
ln(R&D Expenditure per Worker) 0.243*** 0.355***
0.0388 0.0418
ln(IT Expenditure per Worker) 0.284*** 0.202***
0.0409 0.0447
ln(Advertising Expenditure per Worker) 0.283*** 0.211***
0.0623 0.0674
Constant -2.417*** -9.038***
0.496 1.788
Observations 126 126
Number of firms 64 64
Note: *** p<0.01, ** p<0.05, * p<0.1
Hausman specification test – fixed effects estimation for (1) and (2)
Table 3: Determinants of Exporting
(1) (2)
Variables ln(Export Share of Revenues) ln(Percentage Firms Exporting)
ln(Value-Added per Worker) 0.209*** 19.19***
0.0624 4.872
ln(Fixed Asset per Worker) -0.209** 8.136**
0.0817 3.938
ln(Worker per Firm) 0.194*** 25.59***
0.0675 6.041
Constant 4.184*** -262.0***
0.961 77.56
Observations 125 129
Number of firms 65 67
*** p<0.01, ** p<0.05, * p<0.1 0.209*** Hausman specification test – random effects for (1) and fixed effects estimation for (2)
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6. Conclusions
The Malaysian economy has been experiencing deindustrialization since the late 1990s. As
the manufacturing sector is primarily export-oriented, its relative decline is also reflected in the
decline in the country’s trade ratio. The decline also reflects a possible decline in the country’s
participation in manufacturing GVCs. A key issue that may be of importance in analysing this
structural change is the role of services in the performance of the manufacturing sector.
Existing literature points to the important contributions that services make to manufacturing
performance. The empirical analysis in this study validates this.
Drawing from these findings suggest that policy makers in Malaysia should undertake
a more detailed analysis on whether there are existing weaknesses in the services sector that
may have spillovers that adversely affect the manufacturing sector. This is particularly
important given that current statistics indicate that the Malaysia’s manufacturing sector is
increasingly becoming more dependent on services generated domestically.
Based on findings from the literature, services liberalization may be one approach.
Given the predominance of the government-linked companies in key services sectors such as
infrastructure, banking and finance, a related policy implication maybe to further examine how
the role of GLCs in these industries affects the manufacturing sector indirectly. More evidence,
especially at the micro-level, is needed. In this regard, microdata studies in Malaysia are
constrained by data access. Data is collected by the government but researchers have no access
to these data.
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References
Bas, Maria. (2013). “Does services liberalization affect manufacturing Firms' export
performance? Evidence from India”, CEPII Working Paper no.2013-17.
Berulava, George. (2011). “Services Inputs and Export Performance of Manufacturing Firms
in Transition Economies”, Working Paper no.11/17E, Economics Education and
Research Consortium.
Francois, Joseph & Julia Woerz. (2007). “Producer Services, Manufacturing Linkages, and
Trade”, Tinbergen Institute Discussion Paper No. TI 2007-045/2.
Hoekman, Bernard & Ben Shepherd. (2017). “Services Productivity, Trade Policy and
Manufacturing Exports”, World Economy, 40:3, 499–516.
Miroudot, S. and C. Cadestin (2017), “Services In Global Value Chains: From Inputs to Value-
Creating Activities”, OECD Trade Policy Papers, No. 197, OECD Publishing, Paris.
Tarr, David. (2012). “Impact of Services Liberalization on Industry Productivity, Exports and
Development: Six Empirical Studies in the Transition Countries”, Policy Research
Working Paper No. 6023. World Bank.
Wolfmayr, Yvonne. (2008). “Service Inputs and Competitiveness of Manufacturing Exports of
OECD Countries”, mimeo, Austrian Institute of Economic Research WIFO.
Wolfmayr, Yvonne. (2012). “Export Performance and Increased Services Content in
Manufacturing”, National Institute Economic Review, 220:1, R36-R52.
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Appendix: Definition of Services Sector: ISIC Rev.3
• Wholesale and retail trade, repair of motor vehicles, motorcycles and personal and
household goods (G)
• Hotels and restaurants (H)
• Transport, storage and communications (I)
• Financial intermediation (J)
• Real estate, renting and business activities (K)
• Public administration and defence, compulsory social security (L)
• Education (M)
• Health and social work (N)
• Other community, social and personal activities (O)
• Private households with employed persons (P)
• Extra-territorial organisations and bodies (Q)
