“Developmental” States and Economic Growth at the Sub-national Level: The Case of Penang

Summary

Introduction

When electronics manufacturers go to Malaysia, they do not stop in the national capital, Kuala Lumpur, but fly directly to production sites in a distant province, Penang. This small state, near Thailand, with a population of some 1.5 million, has established a reputation as a dynamic hub for technology-intensive goods such as semiconductors and hard disk drives.

Penang has created an environment that seems different — and slightly separate — from the rest of the country. Investors here do not liaise with the federal government, but rather state government agencies for incentives, permits, and licences. They source components, design work, or labour from a variety of dynamic firms nearby, and send their products via local airports or the Internet.

Penang is a “different” state for a variety of reasons. It hosts a long tradition of political activity and is the home of personalities such as the Prime Minister, Abdullah Badawi, and Opposition leader, Anwar Ibrahim. Penang is also the only state with a Chinese majority and Chief Minister and has been governed by a small, regionally-based multi-ethnic party since 1969.

Traditionally a centre for shipping, finance, and trade, Penang overhauled its economic model in the 1970s, following a deep recession. Since then, the state has received several waves of strategic foreign investment and reaped the benefits. Whereas Penang had a per capita income 12 per cent below the national average in 1971, it now enjoys a per capita income almost 50 per cent above average.

The “motor” of the Penang's industrial sector is electronics, which accounts for approximately half of all employment in the manufacturing sector. In 2005, this comprised some 200 multinational electronics firms employing 110,000 workers, in addition to some 350 firms and 25,000 workers in downstream sectors as well as an unknown number of firms in the informal sector.

Penang is not the only centre for electronics manufacturing in Malaysia, as the Klang Valley and Johor Bahru also house sizeable numbers of firms.