 Thank you. I would like to thank the organizers first and of course in particular John for inviting me here Let me Mention that this paper discusses how provincial governments can actively play a developmental role in economic transformation by examining the role of Penang in Malaysia I Would like to mention that the political economy origins drove Penang to assume a proactive role to target MNC's initially in in employment generating activities and subsequently in technological upgrading activities and The focus here being on the integrated circuit I'd like to mention a few things before I go on to this slide One of which is I subscribe to the World Bank book that came out in 1980 by bussing among others That make the point that given the contacts of Malaysia Although Malaysia's growth cannot be seen in the same light as Korea and Taiwan or even Singapore but to them growth with equity was pertinent to To prevent any political crisis and this is a position Francis Stewart takes when she refers to horizontal Inequalities by saying that unless the problems of the majority are met If the government didn't take the position of supporting them That's the boom putras people who are considered to be the sons of the soil Although in real meaning it really refers to the Malays then you could have had maybe the Balkanization of Malaysia and the second point I'd like to make is It's just to contrast the position I took I'm not really clashing or colliding with the views of Justin Lynn because his point of of catch up was more in relation to income When he was referring to Korea against Japan Korea had a per capita income was 30% of Japan and that was approximate But of course many of us have different understanding of Gershengron. I Have from the 1952 work office rather than the 1960 to one Now I'd like to say that That somehow weblin to me comes out more significantly because I'm a technology man having Study technology by being in firms including Intel and advanced micro devices So I see weblin's work blending even though he takes a very sociological Position and like me. I don't have a sociological background in terms of a disciplinary specialization or even Gershengron and he embraces also Schumpeter's notion of Innovation and here I'd like to mention that There is where you find Those recent works say of cunli and others who make the point that Samsung actually caught up much faster than The incumbent that it overtook in memories Hitachi which subsequently became smaller into say renaissance Over that matter Taiwan semiconductor manufacturing company in Logic chips. It's these are two firms that actually Reduce the minimum land weight and I also focus on extending the diameter of the wafer the two dimensions that we consider as Paramount when you look at Frontier innovations in in integrated circuits, of course microprocessors still remain with Intel Now I think that that's sort of point and then at the same time. I also use the methodology that was To me find it by Nathan Rosenberg net and Carl Damon among others and Subsequently work by others in identifying capabilities and that's how I came out with this Stylized framework in the past firm standard to specialize in each of these different activities in a more or less U-shaped value chain this original one that I saw was actually produced by the UN CTC which doesn't exist now United Nations Center for Transnational Cooperation Carl. So one is to run that What has happened now is you see Extensive innovation to be in this industry. There must be huge amounts of innovative potential. You're not talking about Comparable sorts of firm firms that may simply focus on on labor intensive activities We can't talk about the production possibility frontier where firms have an option Depending on the kind of human resource that they have to choose between labor intensity or capital intensive industries This is not possible at all if you are in this industry Dimension of technology will so much. It's simply not possible and the second thing is at all Segments of the chain you see enormous amounts of innovation. I consider R&D support if say innovation is targeted at assembly and test activities In fact much of what happened in Penang. I will discuss later began that way before initiatives were taken to broaden the value value chain So I consider upgrading so long as the firms upgrading in the same segment by introducing supportive R&D or moving leftwards to do wafer fabrication Which is an expensive activity that also functions as an anchor activity, but most of the Appropriators of the synergy are the cheap designers who tend to be higher in that sense and they are not as scale intensive as wafer fabricators, but they are Also very highly in a knowledge intensive Now in terms of the methodology I've actually interviewed all the firms here, so it's The only thing I didn't do is to get their sales sales figures Directly from them, but we have figures from Gartner for each of these individual firms But at the whole microcosm rather than the individual subsidiary because it was not really possible to get that sort of data But we have some figures that can be used Penang MNC in Penang again when we're talking about value chains here, even though there are some firms that contract that are nationally owned and And they act as Subcontract manufacturers, but much of the chain here evolves through multinationals. One has to understand that Penang has Dominant Chinese community and in fact the the political party that won at that time I was led by Lim Chongyu Chinese community and because the federal government lost its majority It actually bargain with this which state chief minister then to come in and he used at the bargaining point to be able to negotiate with MNC's Independently of the federal government. So he was actually knocking the doors of Hewlett-Packard Intel advanced micro devices and others and Attracting them to Penang the only state that enjoyed that sort of autonomy the focus then was on Generating employment because the state was classified as among the poorest states in Malaysia at that time Now what I would like to show is how the state managed to become the second richest state Largely a lot of it internalized through networking between the multinationals The state government and its agencies as well as the meso organizations that it had control over or it could create It did not have the capacity even now. He doesn't have to provide grants. That's a federal issue and then in that sense The the links also meant because the state was conscious that its own performance Highly relying on how successful it will be it actually established collaborative relationships And I had the opportunity to to work with them from 1985 In fact, I used to know the chief minister too with which helped considerably But at the same time they also had Information flows from the firms to the state officials it was around that time There was a massive amount of changes taking place in these firms firms for automating but largely because of Volatile fluctuations in demand. It was pointless to have large inventories The introduction just in time was was very crucial and that actually helped them Transform and that also drove the kind of machinery they introduced and the fact that they had to train workers to become more innovative I'll come back to that if you have questions and then because of the fact that that skills were very important instead of firms internalizing these activities They actually Participated collectively to start the Penang skills development center in 1989. I'll discuss this later but the important point here is that that it was Manifestation of collaboration between the three partners Strategic networking established over the period since the 1970s solved the Penang government using the lines of cooperation to influence the federal government to offer grants to M&C's Since 2005 in fact, that's the link with the state government used In order to ensure that say Intel one of the firms that threaten to leave in fact They had just started the plan in Vietnam then and then subsequently to to start the Penang design center This is a framework that I use that I Accessed in talking to all of these people Including the CEOs of companies as well as the agency in the in the Federal government, METI that is instrumental in providing grants Officially, it was announced in 1991. They only gave national firms these grants until 2005 after which they gave Grants upfront to attract wafer fabrication and designing centers As I mentioned earlier 72 to 92 you had this phase Where employment and exports grew rapidly exports is continued to grow by employment has fallen gradually since because the industry had become very knowledge-intensive Labor shortages and gradual removal of financial intent incentive Against newly emerging sites resulted in a contraction of employment, but exports continued to rise a number of firms upgraded from assembly and test to designing R&D as new firms relocated wafer fabrication activities since the 1990s Intel and so on expected This to happen because of the of the grant the government announced in 91 so they already started that but they didn't enjoy the grant until 2005 This is the pattern you have exports and employment these for the for Malaysia, but if you look at exports About 75% of exports come from Penang and most and in terms of employment It's about only 51% of employment is in Penang that shows that in Penang they become a lot more capital intensive and knowledge intensive These are the firms that are there all of them advanced micro devices altera ace, which is Taiwanese Wago technology Singaporean Fairchild It was originally national semiconductor and Fairchild went down. They acquired the name and changed themselves to Fairchild a Globetronics, which is a national firm Hewlett packet I put a star there because they no longer in semiconductors. They're not there as a result They have migrated out to a different segment of electronics Infineon Which are quite one? segment of Siemens semiconductors technology Intel two different plans one focusing on assembly and test the other one designing integrated device technology Marvel technology Osram renaissance. They all what remains of Hitachi and Siltera, which is a national firm focused on wafer fabrication Actually, that firm is actually the the worst performer in relation to revenue. It is still the worst performer in the last garden reports Now let me mention that the chief ministers initiative was quite central I think also because he twice almost Got defeated by by the opposition who simply came out the idea that these multinationals were sweat shops treating relations and downtrodden humans and he took the initiative to see that supplies evolve but because it coincided with multinationals initiative to stimulate proximate sourcing because it helped them fabricate machinery stamping milling As well as participation in precision tooling activities led to the Development of several suppliers. I mentioned in the in the paper something like 400 over suppliers. Some of them became global service providers and then the the original roles played by the free trade zone pinang Association where they are the role here really brought captains of the different Stakeholders together where they solved problems of power failure infrastructure customs that led to collaboration that went on to to support training supply activities and so on Promotional local suppliers as MNC sought proximate supply. In fact, I'd like to credit myself on this because I I Discovered that happening in multinationals and brought this information to state officials You can you can actually get back to some of them who are still alive. Some of them no longer alive and Then the establishment of collaboration with the university science Malaysia. In fact the programs Particularly related to engineering and IT courses Intel officials Motorola officials And many other company officials Often sit to to fine-tune them in line with what industry wants Then you see the establishment of PSGC Penang skills development center. The state began that by actually charging a whole and tired Building that they had occupied earlier One ring it a year as rent That's their contribution to an organization that they saw as a public good production of public good Meaning a good that was non rivalrous and non excludable Very key to the state's development in return The state required that a certain proportion of of the labor force be trained and train-free Coordination in federal government renew incentives 1985. In fact at that time the the Malaysian government had its second negative GDP growth rate and they were under the tun Mahades administration They were keen on building national national capital then and because of that they Decided to renew this incentive and then the grants in 2005 establishment of Penang development design center they have a clean room RFID radio frequency Lab now which is there to help especially small firms that require Such machinery and equipment and the clean room to do their testing I Can actually discuss this if you have questions because This relationship is a very strong one where a former vice president of Intel himself or the instrumental in the creation of several spin-offs a number of which are still existing and This could be a model that others can use when you have problems how State government can actually come forward and play a more dynamic role in making this point I take this dig now some sort of evolutionary view in that sense I then would differ from say Gersheng Kron or David teeth among others or see in the winter They they make the point that it's not just the initial conditions that matter It's how the actors themselves respond to those conditions and how the vision that they take to transform The structural conditions of a location that matter and in that in that sense These initiatives took Penang to a certain height took took Penang to a point where they were able to enjoy high value added growth high per capita incomes But not sufficient to say participate in the frontier activities I would also make the same point Singapore Singapore is in a much higher Structure if you looked at the capability framework that I developed But then there are no semiconductor firms in Singapore that actually create new stocks of knowledge Comparable to the type I define as the ones that shape the frontier meaning minimum line width and the diameter As you would see in Taiwan the logic chips Industry Completely dominated by TSMC while memories is by some so they are quite far ahead And I also would like to mention that one of the big benefits that you got from here not Appropriated significantly by the Malaysian government Again if we take the Francis Stewart sort of argument Growth with equity of the World Bank argument. That's the position They they the most they can meet in order to a word say a political crisis But that also means that it limits them from moving to the next stage to be a courier or a Taiwan simply because The entrepreneurs themselves Globetronics for example is nationally by Chinese capital owned and therefore they they haven't enjoyed the sort of grants To be able to make the same sort of leap in Moving to R&D activities such that actually Globetronics has their subsidiary plan in Singapore because they got the grant in Singapore I could also mention the number of Malaysian Chinese who and Taiwan the inventor of the pen drive Who's now a billion dollar firm is a Malaysian himself? And so these are constraints that you have to face But if you take the logic of growth with equity, that's all they could they could achieve But important point here is if Korea and Taiwan attracted back the dice for us Leading firms run by the including Samsung Hwang's law that we have in memory Which the the the minimum line with half in every 12 months. This is again something that went against most law and The cheap transistor density doubles Hwang himself started his own firm in 1973, but it went bust in 75 under the heavy and industry heavy industry chemical Industry program where the when the government gave Chibol's all these big subsidized credit He became the CEO of that same plan and now and he also got his name subsequently as the guy who shapes the memory market now we don't we don't have that sort of Manifestations here and even the the thousands of Malaysians who got trained multinationals as invisible colleges that Drove test the the production of tested knowledge in these firms enormous amounts in many of whom In Taiwan and elsewhere now do they themselves did not have the environment the policy environment to to create These leaps in technology Come to conclusions now Well, it's Penang's Penang's achievement in technological upgrading the IC industry has not met the heights of Korea Taiwan and Singapore Its success in stimulating upgrading to support if are in the activities and the functional activities or IC design and Fabrication is no less spectacular. There's nowhere else in Malaysia. You have that Extensively it may prove even more noteworthy as the province had to steer carefully its strategies to work with a national framework But the federal government has more Had been more concerned with ethnic based equity issues in the country Penang's experience obviously offers lessons for provinces and other locations to stimulate industrialization and technological upgrading in medium and large countries strategic networking links the type of Penang can be critical in building linkages and Pathways for stimulating firm-level technological upgrading Penang's provincial framework became successful because of the potency of the productive networking evolved between the foreign MNCs and the provincial Agencies and the federal government Penang managed to convince the federal government to offer incentives to attract from abroad low-value added stages assembly and tests of MNCs from 1971 until the late 1980s and from 2005 grants to stimulate functional upgrading While foreign MNCs have indeed played a critical role in the integration and subsequent upgrading the IC industry Penang the story will not be complete Without a strong mention of the leadership role played by the local actors. Thank you