Changing Resource-Based Manufacturing Industry: The Case of the Rubber Industry in Malaysia and Thailand

Abstract

Over more than fifty years, the economies of Malaysia and Thailand had relatively high average growth rates that allowed them to move from low-income to upper middle-income status. They were dealt a big blow, however, by the 1997/98 financial crisis. Although their gains from the previous growth were not completely erased by the crisis, neither country ever fully recovered from the adverse impacts. They have since been thought to have fallen into the "middle-income trap," given their extended period of "dangling in middle status" and a decline in productivity growth (Agenor et al. 2012; Felipe et al. 2012; Aiyar et al. 2012). In a review of previous studies of the middle-income trap, Doner (2016) suggested that moving beyond middle-income status, among others, requires industrial upgrading from input-based to innovation-based production (of goods and services) to raise value added and to achieve higher efficiency in exports (in terms of price, quality, and delivery). In contrast to highly industrialized economies, however, emerging countries typically have a low level or even absence of technological capabilities for this kind of transformation (Bell and Pavitt 1995; Bell and Figueiredo 2012). Latecomers in manufacturing have to learn basic knowledge and technology before moving toward technological upgrading. To avoid the middle-income trap, it has been argued, three related factors are essential: policies to improve education, infrastructure, and research and development (R&D) (Agenor et al. 2012); institutional strength to support "national innovation systems" composed of local firms, private sector associations , government agencies, and academic institutions (Harrison and Rodrigues-Clare 2010); and close business-government collaboration (Doner and Schneider 2016). However, these factors are not easily available in the middle-income countries. Not only do they require specialized information, efficient cost management, and the participation of various actors, but they may also be hampered by conflicts between old and new interest groups (Aoki 2014; Doner 2016).