Mar 3, 2015 - enhancing foreign direct investment and improvement of overall trade efficiency, such ... investments and technology. .... New Caledonia.
THE 2ND INTERNATIONAL CONFERENCE ON ASEAN COMMUNITY 2015 Theme: Issues, Opportunities and Challenges in the Context of Infrastructure and Linkages Kulliyyah of Architecture and Environmental Design, International Islamic University Malaysia 2nd & 3rd March 2015
TRADE LIBERALIZATION AND COMPARATIVE ADVANTAGE STUDY ON MALAYSIAN CONSTRUCTION INDUSTRY Zuhairi Abd Hamid1 and Foo Chee Hung2
ABSTRACT In line with the ASEAN Framework Agreement of Services (AFAS), Malaysian construction sector is earmarked for full liberalization in 2015. While the introduction of liberalization policies may offer opportunities to access a larger international market, local market is also unavoidable to be opened up reciprocally to foreign players. Since the country’s construction industry has long been characterized as low productivity which depends heavily on foreign workers and physical labour instead of technology and equipment, its competitiveness in the international market is a matter of great concern. This paper aims to present a broad picture on the country’s competitiveness level in terms of exporting construction related services. Through the Revealed Comparative Advantage (RCA) Index and the past records of awarded projects, Malaysian construction industry was found to be in the leading position among ASEAN countries. Its market coverage involves countries from ASEAN, Middle East, Africa, and South Asia. Meanwhile, the industry is still lagged behind compares to the East Asia countries, particularly Japan, China, and Korea, as these players have been penetrating local market successfully through involving in projects with a wide range of value and type. Given that the importance of service exports for the country’s economic growth, the results from this paper can help to identify the comparative advantage of the construction industry, as well as its overall development trajectory, thereby enabling policy makers to plan trade and industrial policy. Keywords: Liberalization; competitive advantage; RCA; construction; Malaysia
1 2
[Executive Director, Construction Research Institute of Malaysia (CREAM)] [Researcher, Construction Research Institute of Malaysia (CREAM)]
INTRODUCTION Today’s world market is moving towards globalization (Adnan & Jusoff, 2009), as a result of the increasing interdependence of economies in cross-border trade of commodities and services, flow of international capital, and wide spread of technologies (Gao, 2000). While it is generally accepted that economic globalization is propelled by the rapid growing significance of information in all types of productive activities and the advancement of science and technologies; liberalization of international trade does play its vital role in terms of facilitating the expansion and mutual integration of market frontiers through the elimination of trade barriers. Apparently, under the framework of General Agreement on Tariffs and Trade (GATT) established in 1947, and its successor – the World Trade Organization (WTO) established in 1995, economic globalization has been occurring in an increased rate over the last three decades (Figure 1). Empirical evidences suggested that countries actively engaged in liberalization have grown more rapidly than others which are less liberalized (Ghoneim, 2010).
Figure 1 Trade globalization ratios (Source: Chase-Dunn et al., 2000; WTO Time Series Database; Geohive; Own calculation)
While liberalization can be highly beneficial to economic development through enhancing foreign direct investment and improvement of overall trade efficiency, such benefits also come with costs. Amongst the risks and challenges are the intense pressure exerted by international community on liberalizing sectors to serve for the vested interests from abroad, without seriously considering the domestic environment, particularly limitations in institutional and regulatory setup and preparedness of local industry to opening up the market (Mattoo and Payton, 2007). As stated by Ghoneim (2010), if liberalization process is not being undertaken in a proper and coordinated manner, a country’s economic and financial stability may probably be exposed to unfavorable external factors, in addition to creating regulatory confusion that could result in increasing administrative costs, investment uncertainty, and other associated problems. Therefore, it is necessary to take coordinated efforts to ensure that liberalization process yields positive developmental, welfare and economic results.
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Malaysia is considered as a great beneficiary of trade liberalization as it has been offered the opportunities to access to a large international market ever since various trade and economic agreements were concluded, signed, and implemented by the country. Through the implementation of a series of trade and investment liberalization initiatives (Figure 2), trade has been made an engine of national growth to bring the economy up to the status of a middle-income country. Up to 97% of the Malaysian GDP is made up of the export component (EPU, 2012b). Following the past successes in globalization and liberalization, the country’s trade policy is directed towards creating a more open and fair global trading environment. Moreover, liberalization is considered as a starting point to rebound the country’s economy to the same level with the world’s developed countries by 2020. To date, Malaysia has concluded, signed or implemented five bilateral FTAs, covering both trade in goods and services. Besides, Malaysia is bounded by regional FTAs under ASEAN with Australia/New Zealand, China, Korea, and Japan. Announcement of 27 sub-sectors unilaterally liberalized
Malaysia-Japan FTA AFAS Package 4
GATS
1995
2001
AFAS Signed
AFAS Package 3
2004
AFAS AFAS Package 5 Package 6
2006
2007
Malaysia-Pakistan Bilateral FTA
2008
FIC repeal
2009
AFAS Package 7 Financial Sector Liberalization
Malaysia-India Bilateral FTA
2010
2011
Malaysia-New Zealand FTA Announcement of 17 sub-sectors unilateral liberalization
Figure 2 Key milestones for service sector liberalization in Malaysia (Source: Adapted from EPU, 2012a)
Many domestic companies have benefited from liberalization. The financial sector, for example, which was once characterized as having a fragmented banking system and poorly developed bond market, have evolved into a new level of performance with many key achievements such as the consolidation and rationalization of the banking industry, diversification of the financial sector with a deep and liquid debt securities market, and the strengthening of corporate governance and risk management practices (Bank Negara Malaysia, 2012). Besides, through liberalization, many Malaysian companies have successfully ventured into the global market in various sectors, such as the oil and gas services sector, education, aviation, health, and other professional services (MITI, 2009). In order to ensure local construction companies are able to compete on par in an open market, as well as to further stimulate the growth of construction industry, liberalization
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is taking place in the construction sector to create a conducive environment for attracting investments and technology. However, as like many other developing countries, liberalizing the construction sector is still a challenging issue for Malaysia to deal with. A review of the world construction market shows that international contracting organizations, which mainly consist of contractors from the major industrialized countries, are occupying an increasingly dominant role in the international construction markets. Although some developing countries have been exporting construction services successfully and have attained a certain competitive advantage, they still have extremely limited success in penetrating the markets of developed countries. Factors that seriously affect the competitiveness of developing countries as well as their access to the world construction markets are such as the rapidly changing economic environment, privatization of public utilities, internationalization of production, diminishing financial assistance from the government, weak domestic banking systems etc. (UNCTAD, 2000). Besides, construction markets are particularly unpredictable, making planning to penetrate foreign market more difficult. Firms attempting to export services must conform to numerous regulations, including the use of land, building regulations, technical requirements, building permits and inspection, registration of proprietors, contractors and professionals, regulations of fees and remunerations, environmental regulations, and even fiscal policy measures (UNCTAD, 2000). Since the Malaysian construction industry has long been characterized as low productivity which depends heavily on foreign workers and physical labour instead of technology and equipment, its competitiveness in the international market is a matter of great concern. Under the ASEAN Framework Agreement of Services (AFAS), a targeted timeline has been formulated for liberalizing the construction industry, where 75% of the equity liberalization is expected to be achieved in 2015, following the target of 51% of equity liberalization set in 2008 (MITI, 2011). To ensure liberalization meets its initial objectives while minimizing any undesirable outcomes, the performance of the country’s construction industry, both in the national and international basis, is necessary to be identified. The present study, thus, aims to present a broad picture on the country’s competitiveness in terms of exporting construction related services. This is done by calculating the Balassa’s Revealed Comparative Advantage Index (RCA) of the 11 services sectors within the country, and the RCA Index of construction sector for countries around the world. Meanwhile, past records of awarded construction projects were also referred in order to present a clearer overview on how both local and foreign contractors perform in the Malaysian construction industry, as well as to further interpret and justify results obtained from the RCA index.
METHODOLOGY Balassa’s Revealed Comparative Advantage Index is also called Balassa Index, or shortly RCA. According to Balassa (1965), the comparative advantage of a nation can be revealed from the nation’s trade performance, by comparing the relative shares of a country’s exports of a particular commodity/service to the world exports. In general,
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trade benefits countries that specialized in the production of goods and services with the lowest opportunity costs. A country is said to have the comparative advantage in the production of a good/service if that country is able to produce the said product/service at a cost (opportunity cost) lower than others. Empirically, RCA is expressed as in Equation 1. The numerator represents the percentage share of a given service sector in national exports, while the denominator represents the percentage share of a given service sector in world exports. A country’s comparative advantage is revealed if RCA > 1, which means the exports share of country i in commodity j is higher than the share of commodity j in the world total exports. A country is said to have a weak comparative advantage when the calculated RCA is between 1 and 2, while a country has a strong comparative advantage when the RCA is between 2 and 3. By having a RCA above 3, a country is said to have a very strong comparative advantage. Equation 1 Revealed Comparative Advantage Index (RCA)
RCA =
=
Although the standard measure of RCA totals sector i over all trade exports (merchandise and services), there are other RCA measures which the differences lay in the summation of the different sectors. One of the measures totals sector i over all service exports (excluding the merchandise), while the remaining one totals sector i over gross domestic product (GDP) of the given country. Interpreting a country’s comparative advantage depends on which measures are to be used. For example, China, a big export country, may report a comparative advantage in construction sector when RCA that totals construction sector over all service exports (excluding merchandise). However, due to the size of China’s merchandise trade, the respective comparative advantage is diminished when service exports are weighted by total trade (merchandise and services). In the present study, two types of RCA measure were presented: (i) the one weighted by total trade (merchandise and services); and (ii) the one weighted by overall service exports (excluding the merchandise). With reference to these two types of RCA, the present study allows for a more nuanced understanding of the role that construction services export play in the country’s economy. Based on the 5th edition of the International Monetary Fund Balance of Payments Manual, service trade statistics are grouped into 11 sectors: transportation, travel, communication services, construction services, insurance services, financial services, computer and information services, royalties and license fees, other business services, personal, cultural and recreational services, and government services (WTO, 2006). Data required for RCA calculation, in a period of 2000 to 2012, is obtained from the United Nations Conference on Trade and Development (UNCTAD) online statistics. The relative competitiveness of Malaysian construction industry is assessed by examining the 5
comparative advantage of the country’s construction services export (i) with comparison to other services sectors within the country; and (ii) with comparison to other countries’ construction industry. Table 1 lists out countries for which RCA were calculated. In the present study, only upper-middle income (with GNI per capita between $4,086 and $12,615) and high income countries (with GNI per capita $12,616 or more) are included in the calculation, while the low income (with GNI per capita $1,035 or less) and lower middle income countries (with GNI per capita between $1,036 and $4,085) are excluded, as to avoid any confusion happens to the RCA ranking due to the inclusion of countries with relatively lower services export in general (i.e. Laos, Myanmar). Besides, low income countries do not often possess completed set of data across all eleven services sectors, which in turn may lead to a higher ranking in those sectors for which data are available. Table 1 List of upper-middle income and high income countries Upper-Middle Income Countries (with GNI per capita from $4,086 to $12,615) Angola Fiji Palau Albania Gabon Panama Algeria Grenada Peru American Samoa Hungary Romania Argentina Iran, Islamic Rep. Serbia Azerbaijan Iraq Seychelles Belarus Jamaica South Africa Belize Jordan St. Lucia Bosnia and Herzegovina Kazakhstan St. Vincent and the Grenadines Botswana Lebanon Suriname Brazil Libya Thailand Bulgaria Macedonia, FYR Tonga China Tunisia Malaysia Colombia Maldives Turkey Costa Rica Marshall Islands Turkmenistan Cuba Mauritius Tuvalu Dominica Mexico Venezuela, RB Dominican Republic Montenegro Ecuador Namibia High-Income Countries (with GNI per capita $12,616 or more) Andorra French Polynesia Norway Antigua and Barbuda Germany Oman Aruba Greece Poland Australia Greenland Portugal Austria Guam Puerto Rico Bahamas, The Hong Kong SAR, China Qatar Bahrain Iceland Russian Federation Barbados Ireland San Marino Belgium Isle of Man Saudi Arabia Bermuda Israel Singapore Brunei Darussalam Italy Sint Maarten Canada Japan Slovak Republic Cayman Islands Korea, Rep. Slovenia
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Channel Islands Chile Croatia Curaçao Cyprus Czech Republic Denmark Estonia Equatorial Guinea Faeroe Islands Finland France
Kuwait Spain Latvia St. Kitts and Nevis Liechtenstein St. Martin Lithuania Sweden Luxembourg Switzerland Macao SAR, China Trinidad and Tobago Malta Turks and Caicos Islands Monaco United Arab Emirates Netherlands United Kingdom New Caledonia United States New Zealand Uruguay Northern Mariana Islands Virgin Islands (U.S.) (Source: The World Bank)
RESULTS The calculated RCA, both weighted by total trade and weighted by overall service exports, are as shown in Table 2 and Table 3, respectively. Throughout the past decade, construction industry has consistently positioned itself as the Top 5 comparative advantage services sector in the country, together with travel sector, communications sector, computer and information sector, and other business services sector. Unlike the personal, cultural, and recreational services that fluctuated drastically, construction sector has been performing steadily, even when services sector have a smaller role to play in the total export composition. A snapshot view of RCA ranking for services sector in 2012 is shown in Table 4. Due to the size of merchandise trade, the value of RCA that takes into account both the merchandise and services exports is relatively smaller than the one which is excluding the merchandise exports. Nevertheless, no changes happen to the construction industry’ RCA ranking when different RCA measures were applied. Table 2 RCA (weighted by total trade) from 2000 to 2012 Category Transport Travel Communications Construction Insurance Financial services Computer and information Royalties and licence fees Other business services Personal, cultural and recreational services Government services
2000
2001
2002
2003
2004
2005
Year 2006
2007
2008
2009
2010
2011
0.573 0.749 0.400 0.753 0.409 0.120 0.129
0.609 1.112 0.534 0.823 0.684 0.091 0.253
0.603 1.094 0.505 0.936 0.267 0.039 0.235
0.550 0.863 0.383 0.551 0.331 0.075 0.233
0.507 1.006 0.611 0.789 0.399 0.052 0.293
0.574 1.014 0.839 1.174 0.461 0.027 0.333
0.534 1.118 0.634 1.230 0.387 0.026 0.368
0.792 1.357 0.625 1.374 0.402 0.025 0.455
0.659 1.378 0.537 0.977 0.385 0.025 0.453
0.547 1.548 0.521 0.774 0.339 0.030 0.648
0.483 1.581 0.609 0.900 0.282 0.032 0.559
0.479 1.582 0.543 0.904 0.387 0.079 0.622
0.408 1.516 0.842 1.092 0.464 0.040 0.825
0.014
0.017
0.009
0.014
0.023
0.014
0.012
0.015
0.075
0.096
0.111
0.157
0.182
1.163
0.822
0.463
0.367
0.363
0.382
0.449
0.427
0.366
0.411
0.470
0.508
0.733
0.162
0.173
7.497
8.138
5.828
5.431
3.002
2.649
2.597
2.026
0.339
0.379
0.480
0.303
0.291
0.259
0.211
0.173
0.163
0.144
0.110
0.048
0.056
0.099
0.105
0.098
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2012
Table 3 RCA (weighted by overall service exports) from 2000 to 2012 Category Transport Travel Communications Construction Insurance Financial services Computer and information Royalties and licence fees Other business services Personal, cultural and recreational services Government services
2000
2001
2002
2003
2004
2005
Year 2006
2007
2008
2009
2010
2011
2012
0.883 1.148 0.574 1.136 0.614 0.179 0.195
0.854 1.551 0.703 1.127 0.936 0.124 0.350
0.883 1.607 0.689 1.327 0.385 0.056 0.337
0.963 1.516 0.624 0.925 0.573 0.127 0.402
0.856 1.701 0.987 1.326 0.666 0.085 0.490
0.935 1.658 1.359 1.897 0.739 0.044 0.538
0.875 1.840 1.036 1.920 0.624 0.042 0.598
1.104 1.906 0.874 1.849 0.551 0.035 0.631
0.981 2.059 0.797 1.388 0.574 0.037 0.666
0.784 2.231 0.743 1.038 0.487 0.042 0.923
0.740 2.338 0.877 1.247 0.415 0.046 0.810
0.695 2.226 0.742 1.204 0.541 0.108 0.863
0.584 2.145 0.874 1.365 0.634 0.056 0.891
0.022
0.024
0.013
0.024
0.039
0.022
0.020
0.021
0.117
0.139
0.048
0.062
0.055
1.693
1.103
0.648
0.614
0.589
0.598
0.700
0.568
0.527
0.583
0.612
0.715
0.807
0.245
0.238
10.746
13.938
9.774
8.770
4.845
3.677
3.843
2.864
0.433
0.535
0.566
0.462
0.405
0.377
0.369
0.291
0.261
0.234
0.152
0.072
0.079
0.158
0.147
0.129
Table 4 The ranking of RCA for all the services sectors in 2012 Rank
1 2 3 4 5 6 7 8 9 10 11
Service sector
Travel Construction Communications Computer and information Other business services Personal, cultural & recreational services Insurance Transport Royalties and licence fees Government services Financial services
RCA (weighted by total trade) 1.516 1.092 0.842 0.825 0.733 0.480 0.464 0.408 0.182 0.098 0.040
Rank
1 2 3 4 5 6 7 8 9 10 11
Service sector
Travel Construction Computer and information Communications Other business services Insurance Transport Personal, cultural & recreational services Government services Financial services Royalties and licence fees
RCA (weighted by overall service exports) 2.145 1.365 0.891 0.874 0.807 0.634 0.584 0.566 0.129 0.056 0.055
In general, Malaysia enjoys comparative advantage in construction service exports. The gradual improvement of the comparative advantage in construction industry is observed since 2005, which can probably be attributed to the implementation of the Construction Industry Master Plan (2006 – 2015). This ten years master plan is developed to improve the productivity and efficiency of the construction sector and enhance the competitiveness of the sector in the foreign markets. Being a strategically important industry in a developing economy, construction sector plays a significant role in ensuring the sustainability of the economy, as well as posing determinant effect on employment, transfer of technologies, investment, and stability of the country. However, construction industry in Malaysia has long been characterized as low productivity industry as it is slow in the adoption and embracing of ICT tools and techniques as compared to other sectors. Although some of more modern ICT tools such as wireless communication, bar-coding and radio frequency identification (RFID) has been developed to assist materials management processes for tagging technologies, most of the tools and techniques used in materials management are said to be under development. Consequently, it has hindered the construction industry from moving rapidly forward. This is especially true when it has been proven in a survey conducted by the Malaysian Service Providers Confederation (MSPC) on ICT spending in the Malaysian major ICT segments (Table 5). One may find that ICT spending in construction industry has been relatively lesser than other industries
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such as manufacturing, wholesales & retail trade, consumer, finance & business services. Even though the professionals are quick to incorporate with computerization into their business processes, the construction firms and builders are still far from adopting ICT in their business. To further improve the performance of the construction industry, it is essential to attract new investment into the sector and enhance the human and technological capacity to increase the productivity and competitiveness of the industry. The achievement of these goals is very much depending on the level of liberalization in the construction industry, which in turn relies on the level of readiness for local contractors to embrace liberalization effort. Table 5 ICT spending in Malaysia by major ICT segments (millions of Dollars) Sector Agriculture Mining Manufacturing Utilities Construction Wholesales & Retail Trade Transport & Communications Finance & Business Services Other Services Government Consumer
2001 38.3 41.5 2,860.70 97.6 22.6 347.2
2002 35.6 47.4 3,111.40 106.2 26.8 377.3
2003 44.0 63.1 3,465.80 124.6 30.5 423.1
2004 51.4 81.0 4,204.4 143.1 32.7 461.2
Year 2005 52.5 108.2 4,320.6 166.5 34.8 499.8
2006 55.7 126.4 4,747.6 194.9 39.0 562.3
2007 60.4 149.2 5,266.0 238.9 42.8 666.4
2008 66.3 169.0 5,756.3 276.9 47.8 769.0
2009 71.9 185.2 6,199.0 318.9 52.8 878.8
283.7
318.3
379
435.4
498.8
591.2
693.6
808.4
923.3
456.8
521.8
586.4
661.2
728.3
838.4
981.1
1,143.5
1,314.0
11.1 12.3 12.8 16.2 24.2 29.6 34.3 350.0 393.3 485.5 562.1 612.7 715.4 829.9 1,215.90 1,486.10 1,658.20 1,940.3 2,083.9 2,236.7 2,421.1 (Source: Malaysian Service Providers Confederation (MSPC))
39.8 976.6 2,709.6
40.3 1,148.1 2,987.8
Are Malaysian contractors competitive in the international market? One possible way to answer this question is by comparing the RCA of Malaysia’s construction service export with other countries’. In the present study, a snapshot of the 2011 country rankings of construction service exporters is provided, instead of 2012, as most countries reported data for that year. Both Table 6 and Table 7 report the RCA ranking of upper-middle income to high income countries for construction industry in 2011, where the construction services were weighted against total exports (merchandise and services) and against all services exports (excluding merchandise), respectively. It should be noted that some countries are excluded in the ranking due to the fact that not all these countries involve in construction services export. A completed set of RCA figures, from year 2000 to 2012, are available in appendix. When the ranking was done based on total trade (merchandise and services), Malaysia was placed at 39th (Table 6), while a higher place was achieved (27th) when only services exports were considered (Table 7). Such ranking pattern is common for countries that actively involved in mass merchandise export because countries with relatively large resource or merchandise export may lose ground in the RCA ranking (weighted by total trade) as their services exports are relatively lesser than goods exports. A typical example can be observed through the RCA rankings of China and Russia, where both these countries have shown tremendous improvement when the calculation of RCA is excluding the goods exports.
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Table 6 Countries’ RCA (weighted by total trade) ranking for construction industry, 2011 Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35
Country Korea, Republic of Montenegro Lebanon Greece Albania Finland Serbia Tunisia Estonia Faeroe Islands Curaçao Sint Maarten (Dutch part) Japan France Bosnia and Herzegovina New Caledonia Israel Spain Portugal Iceland Mauritius Bermuda China Poland Turkey Germany Croatia Belgium Romania Slovenia Russian Federation Latvia Czech Republic Cyprus TFYR of Macedonia
RCA 5.079 4.953 4.214 4.076 3.919 3.866 3.602 3.425 3.225 2.887 2.816 2.760 2.541 2.530 2.476 2.464 2.236 2.036 1.984 1.859 1.803 1.767 1.526 1.507 1.475 1.462 1.445 1.422 1.365 1.307 1.173 1.146 1.144 1.100 1.075
Rank 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69
Country Belarus French Polynesia Luxembourg Malaysia Netherlands Sweden Lithuania United Kingdom Slovakia Austria Hungary Azerbaijan Bulgaria Singapore Saint Kitts and Nevis Denmark Thailand Algeria United States Norway Botswana China, Taiwan Province of Canada South Africa Argentina Kazakhstan China, Hong Kong SAR Trinidad and Tobago Australia Aruba Italy New Zealand Panama Brazil
RCA 1.068 1.046 0.929 0.904 0.851 0.743 0.742 0.741 0.719 0.707 0.705 0.614 0.481 0.459 0.451 0.392 0.358 0.351 0.317 0.285 0.251 0.213 0.172 0.114 0.095 0.095 0.058 0.058 0.051 0.050 0.037 0.017 0.016 0.013
Table 7 Countries’ RCA (weighted by overall service exports) ranking for construction industry, 2011 Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
Country Korea, Republic of China Faeroe Islands Russian Federation Japan Tunisia Bosnia and Herzegovina Finland Estonia Serbia New Caledonia Germany Romania Poland Belarus France Slovakia Azerbaijan Montenegro Israel Czech Republic Algeria Albania
RCA 6.362 3.268 3.237 3.125 2.948 2.934 2.745 2.531 2.388 2.357 1.910 1.811 1.781 1.680 1.675 1.660 1.626 1.616 1.495 1.464 1.449 1.389 1.363
Rank 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58
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Country Netherland Latvia Botswana Sint Maarten (Dutch part) Mauritius Singapore Croatia Austria Sweden Norway Bulgaria Thailand Kazakhstan United Kingdom Bermuda China, Taiwan Province of Cyprus French Polynesia Luxembourg Canada Denmark United States South Africa
RCA 0.767 0.767 0.652 0.608 0.591 0.556 0.544 0.490 0.476 0.471 0.417 0.416 0.378 0.353 0.344 0.297 0.244 0.236 0.214 0.211 0.201 0.199 0.172
24 25 26 27 28 29 30 31 32 33 34 35
Slovenia Greece Turkey Malaysia Spain Portugal Belgium Lebanon TFYR of Macedonia Curaçao Lithuania Hungary
1.276 1.260 1.250 1.204 1.171 1.166 1.153 1.061 1.026 0.955 0.916 0.794
59 60 61 62 63 64 65 66 67 68 69
Argentina Saint Kitts and Nevis Iceland Australia China, Hong Kong SAR Italy Trinidad and Tobago Aruba Brazil New Zealand Panama
0.117 0.114 0.097 0.058 0.047 0.042 0.040 0.039 0.019 0.015 0.010
Based on the two RCA rankings, Malaysia’s construction services export is ahead of other ASEAN countries (Table 8). Coincidently, these countries are also the major market for Malaysian contractors. Local contractors also make their presence in Middle East, South Asia, and Africa (Figure 5). Some of them even involved with projects in countries like Bosnia, China, Mongolia, Papua New Guinea and Hong Kong. The types of construction project awarded to Malaysian companies cover a wide range, with highway, building, power plant, residential, and mixed development being the top five overseas projects that contribute to more than RM65,000 million (Table 9). As one can observe, Malaysian contractors’ focus on overseas projects has mainly been in building construction and road/highway projects, which are areas of export specialty for Malaysian contractors. In fact, Malaysia has been in the frontline of this area, and ahead of many neighborhood countries. To further improve the industry’s competitiveness in the global basis, other areas of work needed to be explored and the associated know-how technology has to be enhanced. These areas of work are most likely originating from high value projects which are more complexes and technology-driven. For example, even though the Penang Second Bridge Project is an infrastructure project, it still requires foreign involvement (Chinese Harbour Engineering) as there is lack of local expertise in constructing the sophisticated and critical part of the bridge. Table 8 RCA ranking for construction industry among ASEAN countries and several selected East Asia countries, 2011 Rank Country RCA Rank Country RCA (weighted (weighted by by total overall service trade) exports) 1 Korea, Republic of 5.079 1 Korea, Republic of 6.362 2 Japan 2.541 2 China 3.268 3 China 1.526 3 Japan 2.948 4 Malaysia 0.904 4 Malaysia 1.204 5 Lao People's Dem. Rep. 0.881 5 Indonesia 1.043 6 Indonesia 0.504 6 Lao People's Dem. Rep. 0.856 7 Singapore 0.459 7 Singapore 0.556 8 Thailand 0.358 8 Thailand 0.416 9 Cambodia 0.220 9 China, Taiwan Province of 0.297 10 China, Taiwan Province of 0.213 10 Cambodia 0.148 11 Philippines 0.151 11 Philippines 0.102 12 China, Hong Kong SAR 0.058 12 China, Hong Kong SAR 0.047
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Table 9 Summary of overseas project by category as of March 2013 Category Total Project Project Value (RM million) Highway 77 17,433.20 Building (Institution, recreation/sport, 139 13,400.88 automation system, commercials) Power plant 16 12,807.87 Residential 55 11,745.24 Mixed development 22 10,256.40 Water treatment system 45 4,969.58 Airport 27 3,726.42 Structural frame 81 3,321.45 Jetty/pot 11 3,051.21 Railway 9 2,873.30 Oil & gas 43 2,808.43 Mechanical & electrical 68 2,149.92 Road 33 595.35 Power transmission 23 454.24 Bridge 7 341.51 Telecommunication 2 134.78 Tunnel 6 123.21 Heavy engineering 10 119.35 Geotechnical 7 69.72 Landscape 1 69.72 Flood/disaster 2 9.80 (Source: CIDB International Project Database)
Up to March 2013, there have been 115 companies venturing into overseas market (CIDB International Project Database), providing services to 50 countries, as compared to year 2010, where 109 Malaysian companies involved in overseas projects originated from 49 countries (Musttafa et al., 2012). However, a declining participation of local contractors in the global market is observed. A total of 59 projects were undertaken by Malaysian contractors in 2006 and the number has declined to only 5 projects in 2012 (Table 10). On a positive note, the declining trend does not indicate a lack of competencies on the part of domestic firms, but rather a softening that has been experienced by major markets around the world. While many trade liberalization efforts have been taken over the years, the construction services sector has not shown big improvement in terms of the participation in global market. Based on a simple analysis of the focus of Free Trade Agreements (FTAs), most trade liberalization initiatives have not involved the sector’s major export markets – apart from countries in the ASEAN region. Major markets, such as the Middle East, have not been part of any trade liberalization efforts, while liberalization efforts with India only began in 2011. Table 10 Number of projects undertaken by Malaysian Contractors in global market, 2006 – 2012 Country/Region Year 2006 2007 2008 2009 2010 2011 2012 ASEAN 13 20 7 2 12 2 India 9 8 1 2 3 2 Middle East 25 29 24 29 4 1 5 Africa 2 3 Others 10 17 20 5 5 4 -
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Total 59 74 55 38 24 9 5 (Source: Adapted from CIDB Construction Quarterly Statistical Bulletin)
Foreign players in Malaysian market mostly involve in projects which local expertise is not available or required skills and technologies that are not affordable by the local players. The country’s construction industry is still lagged behind as compared to those from the East Asia countries, particularly Japan, China, and Korea, as players from these countries have been penetrating local market successfully through involving in projects with a wide range of value. A closer look at the breakdown of projects (based on value range) may find that foreign contractors normally involve in projects valued RM500 million and above. In fact, projects with value range exceeding RM500 million to RM1, 000 million consists of about 15% of the total awarded project to foreign players, while projects with value range exceeding RM1, 000 million accounts for nearly 51% (Figure 3). This is in contrast to the local contractors, where they mostly involve in projects valued from RM0.5 million to RM300 million. Approximately 31% of the projects undertaken by local contractors came from those with value range exceeding RM10 million to RM50 million. Projects with value range exceeding RM50 million to RM100 million and RM100 million to RM300 million contribute about 14.4% and 17.6%, respectively (Figure 4). Among the foreign contractors that involved in local construction work, East Asia (i.e. Japan (24%), China (19%), and Korea (18%)) have been covering a significant portion of work awarded, followed by Germany (10%), Switzerland (7%), and India (5%) (Figure 5). Hong Kong and Taiwan are the other two East Asia countries that contribute about 2% each to the total foreign involvement in local construction work. Among the ASEAN countries, Singapore (4%) and Thailand (1%) are actively involving in the Malaysian construction work.
Figure 3 Share percentage of construction project with different value range undertaken by foreign contractor, 2003 – 2012 (Source: CIDB Construction Quarterly Statistical Bulletin; Own calculation)
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Figure 4 Share percentage of construction project with different value range undertaken by local contractor, 2003 – 2012 (Source: CIDB Construction Quarterly Statistical Bulletin; Own calculation)
Figure 5 The involvement of foreign contractors in local construction work based on value of project awarded, 2007 – 2012 (Source: Unpublished data from CIDB IT Department)
Apart from that, with the recent adoption of green technology in Malaysia, increasing numbers of foreign participants are involved in the construction sector, especially in the development of green buildings and technologies relating to green buildings, prefabrication practices, smart buildings and energy efficient buildings. Although the 14
green building segment is still in its infancy stage, with the emphasis on developing green technology, the green sub-sector is expected to be the next growth area within the construction industry.
CONCLUSION RCA ranking provides an indication of the relative importance of construction services export for the entire economy of a country. Besides, it helps to identify which countries are competitive in the export of construction services export. In the present study, Malaysia reveals little comparative advantage (1
