Infrastructure’s Role in Lowering Asia’s Trade Costs

Infrastructure’s Role in Lowering Asia’s Trade Costs

Building for Trade

ADBI series on Asian Economic Integration and Cooperation

Edited by Douglas H. Brooks and David Hummels

This book analyses and draws policy implications from infrastructure’s central role in lowering Asia’s trade costs.

Chapter 6: Infrastructure and trade costs in Malaysia: The importance of FDI and Exports

Tham Siew Yean, Evelyn Devadason and Loke Wai Heng

Subjects: asian studies, asian development, development studies, asian development, development economics, economics and finance, development economics

Extract

* Tham Siew Yean, Evelyn Devadason and Loke Wai Heng 1. INTRODUCTION Among developing countries, Malaysia is one of the most highly integrated into the world economy, as reflected by A.T. Kearney’s Globalization Index for 2006, in which Malaysia ranked nineteenth. International trade and foreign direct investment (FDI) play an important role in Malaysia’s integration with the world economy, as seen in A.T. Kearney’s indices on trade and FDI integration, where Malaysia ranked second and eleventh, respectively. The entry of transnational corporations (TNCs) through FDI has not only contributed towards Malaysia’s exports, but imports have also increased due to the fragmentation of production across various countries in East Asia. In turn, Malaysia’s progressive integration into the regional production networks that are forged by the TNCs operating in East Asia can be attributed to its relatively strong locational advantages. Excellent infrastructure is one of the locational advantages valued by foreign investors. In fact, the reliability and quality of infrastructure, roads, and air service are three out of the 20 critical location factors that have been found to be very influential in determining the FDI competitiveness of a country (World Bank, 2003, p. 51). In the case of Malaysia, the TNCs operating in the country are producing mainly for export, due to the relatively small domestic economy. Good and reliable transport infrastructure is therefore critical as it affects the relative cost of moving goods across international borders. In particular, with progressive tariff liberalization, this cost is perhaps even more important...

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